China firms hit roadblock in Eastern European projects

China State Construction Engineering Corp secured a road construction contract in Poland in July 2010, its first in Eastern Europe. Nelson Ching / Bloomberg

In early December, shortly after China State Construction Engineering Corp announced a 27 percent surge in annual revenue to 330 billion yuan (37 billion euros), the company's board secretary Meng Qingyu said the outlook for 2011 was bright due to expected growth in overseas contracts.

That optimism took a hit when news broke off the company's unsuccessful bid for highway construction projects in the Czech Republic and the Slovak Republic later that month.

Part of the reason for the company's failure to secure the contracts came after comments from Jan Figel, the Slovak Republic's minister for transport, post and telecommunication. He told local media that Chinese construction companies, especially those backed by the State, are "unlikely" to succeed in Eastern Europe.

And while the comments were not earth-shattering, they do point to a significant gulf between China's construction companies, especially State-backed ones, and officials from Eastern Europe, a couple of whom have made very strong statements that Chinese businesses and experts have interpreted as detrimental to their prospects.

Shortly after Figel's comments, experts and businesses in China reacted strongly, saying Figel effectively blocked Chinese construction companies from the Eastern Europe construction market.

They said the blow to China State Construction will be tough to swallow since the company, in July, secured a road construction contract in Poland, its first in Eastern Europe. Industry experts in China say that the line taken by the Slovak government is a reflection of protectionism that is consistent throughout Europe, where the general economy is slowly recovering but is mired in poor employment numbers.

Though the experts didn't provide any evidence to back their assertions, the timing of this recent divide could not be more painful. The 2012 Union of European Football Associations championship is being held in Poland and Ukraine, and Chinese construction companies had high hopes to win a number of deals for public works projects in the two countries.

In recent years, China has beefed up its investments across Eastern Europe. It has bought up many manufacturing companies and is bidding for numerous infrastructure and energy contracts.

"Taking hold in Eastern Europe can help Chinese companies spread their business around the entire continent," said David Gosset, head of a research center of international economic relations at the China Europe International Business School, in a forum in July.

Some Chinese construction companies told China Daily that they are feeling a backlash after China State Construction won the highway project in Poland.

Data from the weekly trade magazine Engineering News Record show Chinese builders' share of the $101 billion European construction market rose 23 percent to 1.6 percent in 2009. Collectively, the builders are the fourth-biggest foreign players on the continent after the United States, Australia and Turkey.

Petr Hyl, executive chairman of the China Investment Forum, said last year that politicians and businessmen in Eastern European countries have mixed feelings about Chinese contractors and investors.

"On the one hand, they welcome Chinese companies because of their strong economic status and ample capital," he said. "But on the other hand, a lack of understanding of the Chinese conglomerates, especially those with State background, also gives them a sense of fear."

Zhang Zuqian, deputy secretary-general of Shanghai Institute for European Studies, went further. He said that Eastern European countries have little experience in working with developing countries such as China.

"Apart from adapting to local political and legal systems, Chinese companies should also make an effort to blend into the local cultures to make the people there have a positive view about Chinese projects and investments," Zhang said.

A report by the German Committee on Eastern European Economic Relations, which represents five industry associations and 140 top companies, reportedly warned last year that China's increasing number of contracts in Eastern Europe seems driven by "geopolitical rather than economic goals", with potentially "dire consequences" for the European Union.

The report cites how the China State Construction won the highway project in Poland by undercutting the next-cheapest bid by a third.

The committee said Chinese companies won the contracts mainly by "price-dumping, aggressive financing and generous risk-guarantees".

Chinese experts are also fueled by comments by Luisa Todini, president of the European Construction Industry Federation, who told Reuters on Sept 13 that she wanted the European Union to enforce infringement procedures where necessary.