This is marketing research on the construction - China industry and can include information on the background, market structure, definitions, competitors, trends and developments of construction services in China. and is related to other topics such as building, real estate, engineering and infrastructure.

China: Architecture, Construction & Engineering Service Market 2007

Table of Contents

1 Market Demand 
2 Real Estate 
3 Infrastructure 
4 Environmental Development 
5 Market Data 
6 Best Prospects 
7 Market Entry 
8 Market Issues & Obstacles 
9 Sources

From 2002 - 2006, the total output of China’s construction industry increased from $245 billion to $542 billion, a 120% annual growth rate. Rapid development of urban centers, China’s aggressive western regions infrastructure development plans, and the 2010 Shanghai World Expo should provide market opportunities for American companies interested in China’s architecture, construction and engineering (ACE) services market.

On January 5, 2007, the Ministry of Construction issued implementing regulations for foreign-invested design enterprises (FIDEs) to apply for architecture, engineering and design licenses in China under Decree 114. With the issuance of implementing rules for Decree 114, American ACE firms can now apply for engineering and design licenses in China and pursue ACE-related opportunities.

Market Demand

The construction market is a major driver of China’s economy. During the 11th Five Year period (2006- 2010), the plan for total construction is estimated to reach 2 billion square meters each year. According to the Industrialization Report issued by the Ministry of Construction’s Promotion Center for Housing, by 2010, China will have built 80 billion square meters of new housing. By 2020, estimates are 205 billion square meters. Construction spending in China increased 165% in the last four years, according to the National Bureau of Statistics of China, and is still expanding at 25% annually1.

1 Source: Reed Construction June 7, 2007

Real Estate

China is in the midst of a historic urbanization process. Coupled with the privatization of the real estate market, higher living standards, and the presence of multinational corporations in China, home ownership is increasing markedly and demand for residential housing will continue to be strong. High housing costs, poor construction quality, ever-changing Chinese government real estate-related regulations, and limited financing options continue to drag on the housing sector.

Infrastructure

Under the 11th Five-Year Plan, China will invest $26 billion in the construction of eight hydropower projects and $5.9 billion in transferring electricity from western to eastern China. The total investment for water conservation and hydropower projects will exceed $104 billion. China will not only develop hydroelectricity and nuclear power plants, but will also be exploring and developing large coal bases.

China recently explored 28 mid-to-large gas fields, and the development of gas fields and pipelines will also offer potential construction opportunities. Under the 11th Five Year Plan, China plans to build 4 major pipelines for oil and natural gas transport. Furthermore, China will be expanding several key airports and build new sub-branch airports.

Opportunities in infrastructure promise to be especially plentiful in the west. China’s “Go West Campaign” was launched in 1999 to narrow the wealth gap between the well-off eastern coastal areas in China and the poor inland regions. Development in the west is a key priority in China’s 11th Five-Year Plan, and much of the spending has focused on developing infrastructure and enticing foreign firms to invest in the west.

Environmental Development

The 11th Five Year Plan made “energy efficiency” and “environmental protection” top priorities in China’s construction industry. The Chinese government set a goal of reducing energy consumption per unit GDP by 20 percent in the five-year period from 2006 to 2010. The government also plans to reduce energy consumption in residential buildings by 50%. American construction and design firms will have a technological advantage in green construction, as most domestic producers lack expertise in environmentally friendly products.

Shanghai World Expo 2010

The Shanghai World Expo 2010 will be a catalyst in the construction sector in China. The Expo is currently scheduled from May to October 2010 and is expected to draw 70 million visitors. Shanghai's World Expo projects are expected to command an estimated US$3 billion in investment. Opportunities for ACE firms include development and construction of the Expo village, waterfront developments, enhancing the Bund, citywide improvements in infrastructure, four new underground subway lines, and the “One City Nine Towns” project, where the Shanghai government is creating nine towns, each project with a different theme and inspired by a different Western tradition.

For the Expo grounds, Shanghai will build 80,000 m2 of buildings, of which 75% will be temporary structures. There are three models of Expo pavilions: pavilions designed and built by exhibitors, standalone pavilions designed and built by organizers and leased to exhibitors, and joint pavilions built out of renovated old buildings leased to developing countries. The Shanghai World Expo Land Reserve Center (also known as the Shanghai World Expo Land Holding Corporation) is responsible for reserving, developing, renting, and recycling land for the Expo.

For more information on the Shanghai World Expo, please visit www.expo2010china.com or email the Shanghai World Expo Land Reserve Center at land@expo2010.gov.cn. For more information on bidding opportunities, please visit http://www.chinabidding.org/, http://www.sdpc.gov.cn, and http://www.sinoprojects.com/English/index.htm.

Market Data

From 2002 to 2006, the total output of China’s construction industry increased from $245 billion to $542 billion, a 120% annual growth rate. The construction industry ranks fifth in China’s economy2. Presently, China’s construction industry includes 40,000,000 employees, 15,545 design institutes, 104,297 engineering enterprises, and 6,665 construction supervision firms.

From the data on China’s construction industry provided above, it is clearly evident that China has a large, growing, and competitive construction industry. During this period of rapid expansion in China’s construction market, foreign firms did not have the opportunity to fully compete in this market. The reason for this is China’s ACE market was essentially closed to foreign firms from April 1, 2004 to January 5, 2007. On April 1, 2004, the Chinese government repealed Decree 32, the predecessor regulation to Decree 113 and 114, which allowed foreign construction design firms to work in China on a project-byproject basis. On January 5, 2007, the Ministry of Construction issued implementing regulations for foreign-invested design enterprises (FIDEs) to apply for architecture, engineering and design licenses in China under Decree 114. With the issuance of implementing rules for Decree 114, American ACE firms can now apply for engineering and design licenses in China and pursue ACE-related opportunities.

Best Prospects

Domestic design institutes dominate the middle and low-end market. Their strengths are understanding the needs of the local market and knowledge of government policies. However, they lack quality control, exposure to international standards, and professional management experience. Foreign building products and foreign ACE services are perceived as superior to local substitutes.

Most of the clients of foreign engineering firms active in China are foreign investors. These projects are mainly infrastructure projects, factories, hotels, luxury housing, offices, and malls as the requirements for these projects are more sophisticated and clients usually demand premium engineering services and consulting work.

More and more domestic real estate developers are looking for high-quality architectural services. This niche market offers foreign ACE firms good opportunities in the long term. While Chinese architects have rich experience in small and medium-sized buildings, they often lack experience with large-scale projects such as integrated projects. Other weak points include intelligent architecture and the integration of new technology and building materials.

Due to the regulatory obstacles in establishing a FIDE, foreign ACE firms have entered the market by cooperating with local design institutes. Local design institutes can assist their foreign partners in understanding and complying with the complex and opaque planning and building approval processes. At the same time, foreign architects can provide expertise on advanced building design concepts and technology to their local partner design institutes.

Market Entry

Despite the opportunities in China’s market, foreign firms will find that China is not an easy market. American companies have to recognize the need for a special approach to a market with such a contrasting cultural, political and economic landscape. The most successful businesses in China are those that take the time to build strong relationships, become recognized in the industry, and develop products and services that cater to Chinese buyers.

Building good local relations are crucial to foreign firms seeking to provide ACE services in China. Forming a close relationship with a local partner can help you navigate the opaque regulatory system, as well as provide a strong local presence with local contacts.

Presently, most of China’s large projects need to go through an open tender system, and all the bids will be accepted on a competitive basis. The winning bidders and new venue owners will have a great deal of autonomy in deciding how to construct and operate the project and how to award this work. Getting established in China requires patience, commitment, and most of all, time. American firms may need several years to make a profit in China and will face stiff competition from local firms and from other foreign firms.

According to Ministry of Construction data, by the end of October 2006, there were 233 foreign design firms REGISTERED in China, not licensed under Decree 114. 139 foreign design firms were from Hong Kong, 25 from the U.S., 15 from Singapore, and 54 from different countries and regions. (Among these design firms, 207 foreign design firms were joint-ventures companies, 23 were wholly foreign owned enterprises (WFOEs), and 2 were joint-corporation companies.)

Market Issues & Obstacles

The main regulatory hurdles for entering the Chinese ACE market are Decrees 113 and 114. Decree 113 governs foreign construction firms, while Decree 114 governs engineering and design. In order to undertake construction or engineering and design work in China, foreign firms must establish a local presence, either a wholly foreign-owned enterprise (WFOE) or a Sino-foreign joint venture, and this Chinese legal entity must, after establishment, apply for either construction grade qualification or design grade qualification in a particular industry. This qualification determines the maximum value of projects that the construction enterprise may undertake.

Decree 113 carries a prohibitive registered capital requirement where obtaining Special Grade construction qualification (unlimited qualification to undertake projects of all types and values) requires US$38 million, while contractors without Special Grade qualification cannot undertake projects with a value greater than five times their registered capital (a firm would need $1 billion for a $5 billion project).

Decrees 113 and 114 also require large numbers of technical personnel in order to obtain qualification certificates. Furthermore, Decree 113 requires all foreign technical or managerial personnel to spend at least three months per year in China.

Unlike construction services, the opportunity exists for foreign engineering and design companies to undertake some design work offshore, insofar as Decree 78 allows foreign engineering and design companies to work in cooperation with locally qualified engineering design institutes if the offshore services involve engineering design beyond the basic initial conceptual design stage.

The new Decree 114 Implementation Regulations provide considerable improvement and were issued on January 5, 2007. The Decree 114 Implementation Regulations have mitigated the more restrictive personnel requirements, insofar as they allow the Foreign-Invested Design Enterprises (FIDE) to “temporarily” meet its percentage requirement of foreign technical personnel who are qualified as registered architects or registered engineers in China, by hiring Chinese registered architects or registered engineers. The FIDE may also meet the percentage requirement of key technical personnel by employing Chinese technicians. In addition, the Decree 114 Implementation regulations relax the sixmonth residency stipulation, if it cannot be met ”temporarily”. The Decree 114 Implementation Regulations also allow newly established FIDEs to apply for Grade B or Grade C design qualification grades in their initial application. After receiving a temporary certificate, the FIDE must wait for two years before it can apply to upgrade to the next qualification grade.

Sources

U.S. Department of Commerce