Industry Overview: Architecture, Construction & Engineering
Services
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% annually.
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.
Regulations
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 Entry
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
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.
Home Ownership Benefits
A substantial tax advantage is available for those Chinese in the high-income bracket who own their own homes. People in this category are a small percentage, but are still comparable in numbers to the entire population of Canada. Some people are buying additional homes just so they can continue receiving the tax benifit.
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.
Fast Facts
- By 2010, China will have built 80 billion square meters of new housing.
- 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.
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