The Implications of Chinese Influence in the U.S. Construction Industry

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1 Aon Risk Solutions Construction Services Group Aon Infrastructure Solutions The Implications of Chinese Influence in the U.S. Construction Industry March 2017 Risk. Reinsurance. Human Resources.

2 Since the Global Financial Crisis, China has dominated the global construction marketplace, producing over $3 trillion worth of domestic construction value in 2016 alone. 1 Massive investment in ambitious infrastructure and urban development programs has given rise to large state sponsored entities including contractors and development banks that specialize in construction. These institutions significance is not confined to the domestic market, but also has been utilized to increase China s influence of construction in international markets as well. In 2014, nearly 20% of projects in Asia and the Middle East performed by contractors outside of their native country were performed by Chinese contractors, and 50% of all such projects in Africa were performed by Chinese contractors. 2 This trend is present in the Americas, as the Chinese continue to make aggressive acquisitions in Latin America of natural resources and previously dominant Brazilian construction entities affected by the country s recent economic and political turmoil. World Bank World Development Indicators Database February 2017 Looking ahead, China s 13th 5 Year Plan only promises to increase the country s outgoing foreign direct investment, as one of its five core focuses is increasing international cooperation and collaboration. China continues to have strong faith in the value of construction and infrastructure projects, committing 6.9% of its GDP, or $759.4 billion, to these projects in In both of these regards, China has begun its One Belt, One Road initiative which is estimated to create over $3 trillion worth of infrastructure development throughout Asia, Africa and Europe and will likely increase partnership between Chinese firms and local construction entities. 4 With the fall of commodity prices and the relative slowdown of the Chinese economy in 2016, it is no secret that Chinese construction companies, having become used to the rapid growth of the last eight years, will seek to satisfy their appetites abroad. However, a question remains: what does this mean for the US? 1 IHS Global Insights Global Construction Outlook Database December Engineering News Record 2015 Top 250 International Contractors 3 KPMG China Outlook Fortune Inside China s Global Spending Spree December Aon Risk Solutions The Implications of Chinese Influence in the US Construction Industry 2

3 ENR 2015 Ranking of the World s Largest Contractors, By Total Revenue 2015 ENR Rank Firm 2014 Total Revenue 2014 International Revenue (millions USD) 1 China Railway Group Ltd., Beijing, China $113,105 $5,464 2 China State Construction Engineering Corporation. Ltd., Beijing, China 3 China Railway Construction Corporation. Ltd., Beijing, China 4 China Communications Construction Group. Ltd., Beijing, China $110,579 $7,239 $97,044 $2,450 $60,314 $15,827 5 Vinci, Rueil-Malmaison, France $51,868 $19,679 6 ACS, Actividades de Construcción y Servicios SA, Madrid, Spain 7 Power Construction Corp. of China, Beijing, China $46,081 $38,707 $38,689 $11,653 8 Bouygues SA, Paris, France $32,335 $14,201 9 Hochtief Aktiengesellschaft, Essen, Germany 10 China Metallurgical Group Corp., Beijing, China $31,118 $29,299 $30,026 $2,669 Aon Risk Solutions The Implications of Chinese Influence in the US Construction Industry 3

4 Engineering News Record 2015 Top 250 Global Contractors Report In 2016, China made record level investment in the United States at $54 billion across all industries, a 350% growth from the previous year. Following the Global Financial Crisis, the US construction market experienced a shift; global construction mega-contractors, primarily from Europe, have begun bidding on large US infrastructure projects, often forming joint ventures with, or acquiring. US contractors. Even so, of the largest 250 construction contractors in the world in 2015, 65 were Chinese, earning $89.7 billion, or 17% of 250 s international revenues. As such, Chinese construction firms are likely to begin a similar penetration into the US marketplace as we witnessed with European contractors. Chinese acquisitions of US construction and manufacturing firms have already begun, such as the 2014 acquisition of Plaza Construction Corp by China State Construction Engineering. Further, China s State Council Made in China 2025 initiative has proposed adopting US manufacturing practices and technology, and will likely prompt Chinese acquisitions of premier US manufacturers. Nonetheless, just as US firms have had difficulty in penetrating the Chinese market, the American market has reciprocated with hurdles for Chinese firms, as evidenced in the collapse of a Chinese Zoomlion s acquisition of US crane-maker Terex Corp in Globally, upwards of $40b in Chinese overseas M&A deals have been blocked by governments since 2015 due to security reasons. However, China s stated plans to increase its economic ties with the West will likely cause them to look for ways to allay the concerns of foreign regulators. In support of this, the state has promised to ease regulation on foreign acquisitions of domestic businesses that have likely posed an obstacle to activity with the US in the past. As the US construction market becomes increasingly influenced by international transactions and China exports capital, people and the belief in the value of infrastructure, it is becoming more likely that Chinese entities will become vital players in the US construction space. Firms that already have an American presence should plan early around the potential opportunities and risks inherent to increased Chinese penetration into the market. Understanding issues and solutions regarding joint venture partnerships, transaction liability and the approach to risk management and procurement by Chinese firms will be vital to staying competitive with new market entrants and taking advantage of new opportunities posed by this development and the shifting of the US construction landscape. For further discussion, please reach out to our Aon Infrastructure Solution s team, the market leading provider of risk advisory services for global construction and infrastructure clients. -Forbes, China Investment In the US Hit An All-Time High In 2016, December Engineering News Record 2015 Top 250 International Contractors - Bloomberg, Terex s Chinese Suitor Talk Ends, Konecranes Deal Proceeds, May Financial Times, Resistance to China s acquisition spree stiffens, October Aon Risk Solutions The Implications of Chinese Influence in the US Construction Industry 4

5 Contact Cole Falconer Risk Analyst Aon Infrastructure Solutions Aon Risk Solutions The Implications of Chinese Influence in the US Construction Industry 5