By Mauricio Baltodano | Special to The Tico Times
Costa Rica is known worldwide as a tourist country. It has become one of the favorite destinations for hundreds of foreigners, not only to visit, but also as a place to live. This has created a new market that has caused the construction industry to grow incredibly fast during the last two decades. New architecture, engineering and construction firms have been born. Some have become so successful that they are currently competing in the international market.
However, these companies are challenged by international enterprises that also compete in the local market. Some examples of multinational foreign firms working in the construction industry in Costa Rica are Gensler Architects, Turner Construction and Emerson, among others. Most of these corporations operate in many other countries, providing them better opportunities to establish in bigger markets.
We have been exploring how Costa Rican architectural, engineering and construction (AEC) firms could introduce themselves into China, to create new businesses. Nowadays, the People’s Republic of China is a huge open market, which offers vast opportunities for the construction industry. The Chinese market can catapult these companies to an international level and boost them into larger competition to achieve bigger goals.
Fortunately, Costa Rica has new policies directed at promoting globalization and removing barriers to big markets. Costa Rica and China’s Free Trade Agreement entered into force on Aug. 1, 2011, making China the second largest trading partner for Costa Rica.
Today, the People’s Republic of China has a population of more than 1.3 billion, and 9 percent gross domestic product, maintaining steady growth since 1978. China has become the world’s largest foreign direct investment receiver from 2006, according to the World Bank.
Current data on China’s construction industry
China got membership in the World Trade Organization in 2001, promoting a progressive opening for the construction industry. This also opened an important destination for foreign architectural, engineering and construction companies, which win selective bidding competitions for projects above $25 million.
The Chinese construction industry is one of the world’s largest, with a total output of $151 billion in the year 2000. It is expected to increase to $700 billion by 2015, as reported by the China Statistical Yearbook in 2002. According to the National Bureau of Statistics of China, there is a 25 percent annual expansion in construction spending. In addition, the Chinese government’s stimulus plans will speed up development of this market.
Domestic real estate is looking for high-quality architectural services to satisfy a demanding market. Chinese architects have good experience with small- and medium-sized buildings, but lack experience with large-scale and integrated projects.
Local Chinese companies have the advantage of knowing local market needs and government policies, but they lack a lot of quality control, exposure to industrial standards and professional management experience.
Presently, local clients and developers have been driven into a more Western and contemporary style of architecture, instead of traditional approaches. These local firms still need to include intelligent architecture and to integrate technology and new building materials. This offers favorable circumstances to foreign construction enterprises to penetrate and offer superior services in this new niche.
Another big advantage offered by foreign AEC firms over local Chinese companies is that international construction processes are marked by the combination of business and project management skills. This means that most Chinese clients of foreign engineering firms currently active in China are foreign-invested enterprises.
Another segment in construction created for foreign AEC firms includes infrastructure, factories, hotels, luxury housing, offices and malls. These projects have higher requirements because they are more sophisticated, and Chinese clients demand premium engineering services and special consulting work.
Costa Rica-China Free Trade Agreement
The free trade agreement between Costa Rica and China specifies regulations for all types of business among enterprises of these two nations. To start construction business in the Chinese market, AEC firms must clearly specify whether they will enter the market as a representation company, a subsidiary, or in partnership with a Chinese firm. Costa Rican enterprises now have the security that these regulations form a legal framework between both governments.
Suggestions for Costa Rican AEC firms entering the Chinese Market
Although China represents a very attractive market, AECs face considerable barriers and obstacles when applying for licenses to operate in China. Foreign firms must enter the Chinese market as consultants to local firms before licensing. There are multiple options to overcome these barriers, including:
• The joint venture
In 2011, the China Europe International Business School developed a Poll of Foreign Executives to analyze the challenges faced by foreign managers working with Chinese partners. More than half of the executives of companies from 33 countries responded that it is “difficult” or “very difficult” to work with Chinese partners. Nevertheless, some assert that joint ventures are difficult even when the two companies come from the same country.
Data from the China Statistical Yearbook, 2012, show an increase in the number of Foreign Enterprises of Total Capital over Joint Ventures. The biggest change was noticed after 2001, when China entered the WTO. This created an opening in many market segments, and foreign investors took advantage of it.
After 2000, the increase in the number of foreign firms in China continued, although the number of joint ventures started to decrease. Many existing joint ventures already had the necessary experience to cope in the local market and no longer needed local help. At the same time, local firms had acquired the knowhow needed to compete with international firms on their own.
This pattern has prevailed for the last decade, so it may no longer be advisable to create a joint venture with a local firm, but this will depend on the company’s goals. It is important to understand that most joint ventures are created to reach certain objectives, and when this happens, the joint venture can be broken on good terms, while good relations remain. There are several cases in which the joint venture is so successful that it becomes a long-term relationship.
In the specific case of joint ventures between foreign and Chinese firms, the inquiry by the business school showed the difficulties for foreign managers working with Chinese partners. They included issues such as: differences in managerial style, cultural differences, priority conflict, differences over business concepts, different strategies, and others, including ethical problems.
To reduce such problems, a manager who understands both sides of the culture and managerial differences is a very suitable solution. This advice is useful for any foreign firm entering the Chinese market. According to the book “Resolution of Conflict” by Morton Deutsch (1973), it is important to understand from the beginning that both sides of the venture must know that when a problem arises, the decision taken to solve it must be given by cooperative analysis for a win-win solution.
• The Hong Kong International Financial Center as middle businessman
With the needed expertise and knowledge, this region can handle into consensus the business needs of both Chinese and foreign companies, and their financial institutions. Hong Kong works as a middle businessman that guarantees that nothing will be lost in translation.
• Representative offices in China
Representative offices are a common way for foreign companies to introduce themselves into the market. These offices are a legal possibility that the Chinese government provides so that foreign companies can start to operate inside the market, with a restricted number of employees and infrastructure, but with no obligation to bring in any type of capital and a short timeframe. Usually, companies use these representative offices even before they make a joint venture or when wholly foreign-owned enterprises make big investments.
This has several advantages: simple application and registration procedures; less stringent regulatory compliance; zero registered capital requirements; and relatively predictable tax costs. Many of these advantages are well known by the government, but since they employ hundreds of workers, it became a win-win relationship.
Since 2010, the Chinese government has periodically reinforced the administrative requirements and regulations for these offices. These include requiring the notarization of official documents by a qualified public notary. At the same time, registration must be verified by Chinese embassies or consulates.
January 2010 marked a big change in representative offices, since they used to have zero tax liability, and from this point they started to pay taxes. Still, with taxes and limitations required to function in Chinese territory, representative offices are a low-cost opportunity for foreign firms to start analyzing the market. The multiple requirements foreign companies face in today’s Chinese market panorama are common to any Costa Rican firm that works in the international market.
Costa Rican architectural, engineering and construction firms face a new reality. Globalization has allowed multinational corporations to move and compete worldwide, creating a very harsh environment for local enterprises. But this new reality also means that Costa Rican AEC companies also have the opportunity and ways to enter one of the biggest and most moving markets of the world, and to compete with these international firms.
There are numerous possibilities, such as those mentioned above, to venture into China’s growing market. A company can test the Chinese market without venturing completely; it can associate with a local firm and get to know aspects of this region, such as the culture, which will affect its business; or it can start operations on its own.
Mauricio Baltodano is completing his master’s degree in Business Administration at the University of Shanghai.