When Sinohydro started building an apartment block in Libya in 2008, the US$2 billion project could not have seemed safer: it had been commissioned by the government of the now-deceased Colonel Muammer Gaddafi, who had a tight grip on his country.
But three years later, the Chinese engineering company and world’s biggest dam builder found itself scrambling to evacuate its employees as Libya descended into civil war.
After years of expansion into emerging markets and developing a reputation along the way for taking on projects in difficult environments, experiences such as Libya are prompting a change in the way that Chinese companies assess risk. The shift – backed by Beijing – comes as Chinese companies increasingly compete with Bechtel, Hyundai Engineering, Leighton and other international contractors.
“We’d rather drool than shed tears,” Wang Zhiping, Sinohydro’s board secretary told the Financial Times in his first interview with foreign media.
Sitting in a sparse room in Sinohydro’s headquarters, Mr Wang, one of the top executives, explains that the company would rather pass on a risky project than bid successfully and end up regretting the move later.
Flanked by five senior managers, Mr Wang says Sinohydro decided to take a more cautious tack about five years ago, saying “our risk prevention awareness was poor at that time.”
Over the past decade, Sinohydro, which built the Three Gorges Dam in China, has expanded rapidly overseas with international contracts accounting for 47% of the US$18.3 billion in revenues it generated in 2011. With projects in 60 countries, it is the 14th biggest global contractor, ahead of Japanese groups such as Kajima Corp and Obayashi Corp.
Chinese engineering companies last year produced US$117 billion in revenues from contracts outside China – a 10-fold increase over the past decade, according to the Chinese government.
Five of the world’s top 10 contractors are now Chinese, according to the Engineering News Record, a trade publication.
While Chinese contractors can compete on technological prowess, they face a big challenge dealing with political risk, particularly after hard-earned lessons through kidnappings in war-torn areas such as Libya, Mali and Afghanistan.
Many of Sinohydro’s overseas projects – from mines and roads to power stations and football stadiums – are funded by Chinese loans to the host country, which are repaid with resources such as crude oil.
While the model has helped cash-strapped governments that might otherwise shy away from building needed infrastructure, it has left Chinese companies exposed in many of the world’s conflict zones.
“If the risks are too high, we just won’t go there [now],” says Mr Wang. “Our greatest concern is the instability caused by political risk in overseas markets, including armed conflict.”
Sinohydro’s “caution” list includes Iraq, Afghanistan and Myanmar, where the military junta unilaterally suspended a US$3.6 billion hydropower project in 2011.
This makes the group’s stance slightly more conservative than some of its state-owned peers, such as the Chinese oil companies that are starting to take a leading role in projects in Iraq.
Sinohydro says its shareholders benefit from this risk-averse attitude, because political uncertainty could make it hard to make money in these countries.
While it is now listed in Shanghai, Sinohydro is still an arm of the state, with 65% of its equity held by its state-owned parent corporation.
The shifting attitude reflects some costly lessons. Mr Wang says the conflict in Libya cost Sinohydro US$1.2 billion in suspended contracts and US$200 million in writedowns.
“That is just an estimated figure,” says Mr Wang. “For other losses, like how many cars have been blown up, or exact losses for every physical asset . . . it is very difficult to get an exact number.”
Sinohydro has also been caught up in other conflicts with workers either killed or kidnapped in South Sudan and Afghanistan. And the current conflict in Mali threatens to jeopardise one of its hydropower projects.
Sinohydro’s increased caution is being mirrored by other Chinese companies – partly because of encouragement by Beijing. The commerce ministry recently issued new regulations for overseas contracts that include tougher environmental standards and fresh anti-corruption rules, in a tacit admission of the challenges that have accompanied China’s rapidly expanding commercial presence overseas.
Chinese contractors were initially propelled overseas by the abundance of cheap, state-backed loans available to support Beijing’s directive to “go out”. That close relationship with the state helped them capture market share.
For example, 80 of Sinohydro’s 204 overseas hydropower projects are supported by Chinese bank loans, according to a list of projects compiled by International Rivers, a US-based environmental group.
Sinohydro now wants to move beyond emerging markets – a move that will also reduce its dependence on state-backed financing.
“The European and American markets are our next focus for international business,” says Mr Wang. “We want to be a world-class contracting company.”
But moving into developed markets is not always easy. Several Chinese companies have struggled with projects in Europe. Covec, a subsidiary of China Railway Group, won a bid to build a highway in Poland, but was fired halfway through the project.
Despite these hiccups, many experts believe that Chinese companies will succeed in the most competitive engineering markets. Hisaka Kimura, an investment specialist at the Asian Development Bank, says it is partly due to their increased technical sophistication. Optimists point out that the Korean and Japanese engineering groups that today are among the world’s largest similarly started out by being “cheap and cheerful”.
“Just as British and American companies built the world’s infrastructure 30 and 40 years ago, followed by the emergence of Japanese and Korean construction companies, Chinese companies are following the same trend,” says Shourav Lahiri, a lawyer at Pinsent Masons who advises on Chinese infrastructure deals.