China: set apart from the rest

21 August 1995 00:00  [Source: ACN]

Recent John Brown projects in China
Client	Product	Location	Status
Amoco Orient	offshore oilfield	Liuhua	C
Phillips Petroleum	offshore oilfield	Xihiang	U
CNTIC	acetic acid	Shanghai	U
Chuandong Chemical	VCM	Wanxian	U
Nocic	caprolactam	Nanjing	U
Shengli	butanediol	Dongying	U
Sinonewtech	oleum	Hebei	U
Dongying	caustic soda	Shandong	U
Guangning Renmill	chlorine dioxide	Guangning	U
Shenyang Smelter	sulphuric acid	Liaoning	U
Tang Shan Starch Glucose	glucose anhydrate	Tang Shan	C
Wanquan	citric acid	hebei	C
Chengdu Institute	vaccines	Chengdu	C
N/A	pharmaceuticals	N/A	U
N/A	pharmaceuticals	N/A	U
Source: John Brown

IF THERE is one country that is an exception to the rules of doing business in Asia Pacific, it is China. While the scope for work for foreign contractors is ever-increasing in China, so are the risks.

Some contractors will be deterred. Most will join the fray, lured by the country's plans to invest US$10bn in the chemical industry in the next five years.

'China is a very active market that is still attracting foreign investors. Consequently, the contractors will follow,' explains Graham Green, John Brown's Asia Pacific business manager.

However, he sees the traditional approach to awarding contracts changing, regardless of whether the project is wholly Chinese or a joint venture with a foreign chemical company. In the past, foreign contractors tended to act as mediators between the technology licensor and the Chinese authorities in Beijing. 'They would take the licensor's package, carry out extended basic engineering and then hand over to one of the local design institutes,' says Green.

Sometimes foreign contractors also procured overseas equipment. The rest of the engineering, procurement and construction was in the hands of the Chinese client.

Wholly owned Chinese projects still require the minimum input from contractors but the partial decentralisation of the market has seen more power allocated to individual operating companies.

Contractors can no longer negotiate contracts in Beijing. To accommodate this change, John Brown has expanded its operations in China and added two more offices in Shanghai and Guangzhou to its existing one in Beijing. In total, it employs 15 people in China.

Still, Green admits, it is difficult to cover the whole of the country. 'It can sometimes take days to reach a client, such is the size of the country. For this reason, many companies try to focus on specific provinces which they feel they can adequately service.'

The biggest changes, however, have been brought about by foreign investors setting up joint ventures in China. Typically, these foreign companies want the security of using the tried and tested procedures offered by international contractors.

Yet, the requirement to use one of the Chinese design institutes remains, sometimes because the Chinese partner will specify the use of a particular institute. Also, the design institutes are an invaluable source of local knowledge and conditions.

'Every province has various rules and regulations but often they are interpreted slightly differently by different towns. You need local assistance,' Green insists.

China has about ten major design institutes, each employing around 2000 people. Their skills vary. Some are on a par with foreign contractors, employing the latest computer-aided design technology. Others are not. 'It is imperative to know the competence of the individual institutes,' says Green.

Certainly, John Brown is sufficiently confident of its local knowledge to offer fixed price design engineering to joint ventures. More recently, it has added fixed price procurement to its list of services based, once again, on its knowledge of what is available from Chinese equipment and material suppliers.

Green cites carbon steel pipe and pressure vessels as being readily available in China, although stainless steel is more difficult to source. But fabricators must be checked for quality and reliability.

'When we win a contract, we send people to the province for three to four weeks to visit local suppliers,' he says, and he has no doubt that capabilities are improving, driven not only by foreign contractors but also by Chinese contractors.

Such supervision of vendors, however, is time-consuming and costly. But with an increasing number of foreign chemical companies setting up businesses in China and making profits there, it is advantageous for them to use the money to buy local equipment, notes Green.

The next phase, after fixed price engineering and procurement, is fixed price rather than reimbursible construction. 'At the end of last year, clients started asking for lumpsum turnkey bids, says Green, and the push is coming from the foreign chemical companies which want a single point of responsibility for the project and limited risk.

For the contractor, Green reckons the major risk in this type of contract in China comes from possible over-runs on construction time and resources.

New regulations in July last year, intended to control the activities of foreign contractors in China, play an important role in project scheduling. The regulations, according to John Brown's interpretation, require a contractor to seek a licence if it carried out engineering, including responsibility for a design institute.

Similarly, licences are needed in China for undertaking procurement, construction management and full construction.

The approval process for a licence takes about six months but it cannot be started until the contract has been awarded. The license is valid for five years but only for the province where the work is done.

Despite this licensing procedure, Green says projects can be completed to schedules acceptable to foreign companies.

What takes the most time is gaining approvals for setting up the joint venture and for the joint feasibility study.

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