Chinese Investment in the West: Drop the Labor, then Do the Math

June 27, 2011 Posted by China Briefing Reading Time: 4 minutes

Op-Ed Commentary: Chris Devonshire-Ellis

Jun. 27 – As Chinese Premier Wen Jiabao hits London as part of his European tour, calls for China to be allowed to participate in tender processes have increased, and not just in Europe. Of particular interest in the West is China’s game changing high-speed rail technology, which has distinct advantages as it can use existing infrastructure and this cuts down on highly expensive complete rail restructuring.

Never mind that much of the technology was originally European and Japanese, the Chinese have been able to take these innovations, improve upon them, and provide low cost trains and track that offer a viable alternative to flying. China, after all, will have been able to have built 13,000 kilometers of high speed track by next year. No wonder that both Europe and the United States, let alone developing countries such as India and those in Latin America, show interest.

But amid all the posturing and questions being asked if U.S. consumers really want to see Chinese-built infrastructure on their national rail network comes the devil in the detail. And it’s here that the Chinese still have a long way to go. In the United Kingdom, the Chinese Ambassador to the UK Liu Xiaoming has called for China to be handed the contracts to build Britain’s new high-speed rail link.

“There’s a lot of talk about getting more Chinese investment, but we need more action,” he said ahead of the visit. “Chinese businesses need to identify flagship projects and high-speed rail might be one of them.”

But here rises the culture gap. “They are very keen to do the rail link, and they do not really understand our tender process,” said one source close to the negotiations. That statement, artfully put, is in reference to the very nature of China’s pricing when it comes to competing for tenders. Used to build-operate-transfer (BOT) agreements with everything from power plants to roads in parts of Asia, Africa and Latin America, the portion China comes up against in the West is the single most expensive part of the equation: Labor.

China’s experiences in the developing world in tendering for major contracts have often included the use of Chinese labor to execute the project. Indeed, entire shanty towns spring up overnight, and thousands of Chinese laborers are shipped in. Such use of labor overseas almost always runs contrary to local laws and national regulations over the issuance of work and safety permits, the use of local labor, in addition to breaking the host nation’s individual income tax laws, but lax policing, state inefficiency, simple corruption or authoritarian states allow many to turn a blind eye.

The Indian government clamped down hard on the issuance of tourism visas to Chinese nationals last year following belated State realization that many of them were using the process to take up positions in BOT contracts. Some of India’s regional officials, keen to get infrastructure in place, looked the other way when it came to the blatant breaking of tax and visa laws and permitted BOT contracts to operate with purely Chinese workers. In order to keep the local population in the dark, many such projects, such as the building of a port on Sri Lanka’s east coast, involve the placing of high security road blocks to prevent access and even Chinese machine gun manned security guards to keep curious locals away. If no-one can see the project, no one can get politically upset about the lack of involvement of local labor, even if that labor is generally considered lazy and inadequate. It is, in many cases, a pragmatic, yet somewhat grey solution to getting much needed projects built. Never mind that it is usually illegal. Authoritarian governments can always find a way.

However, it’s the apparent low cost of Chinese tenders that look attractive, and are leading many to assume those favorable prices can be exported. As China has shown, they can. It suits China as well. With an estimated four to five million Chinese workers overseas, often in the world’s trouble spots, it is a cheap way for the Chinese government to do away with potential unemployment issues and offers a cheap and reliable solution to emerging countries requiring a quick project fix. But in the case of the Indian experience, that cheap, quietly imported labor scheme began to unravel when Chinese nationals were killed on Indian soil as a result of substandard constructions collapsing. The BOT labor structure doesn’t seem very able to cater for the covering up of deaths. The longer-term worry is that it may cover up inappropriate cost cutting that only comes to light when the Chinese labor force has left.

While the Chinese experience in emerging markets may have lead the Chinese to believe they can export such BOT projects globally, the reality is that in the West, the more transparent democracies are going to find it politically very difficult to accept a mass influx of Chinese workers to conduct such projects in full. Hence recent murmurs of the Chinese “not understanding” the tender process.

While solutions can always be found, China may yet have to learn, and Western governments understand, that the China price may indicate an entirely different way of thinking and conducting business than either are used to. It may be some considerable time before we see a Chinese-built American high speed rail track system in place, let alone one in the UK. Those terms, and those tenders, operate on rather different principles.

Chris Devonshire-Ellis is the Principal of Dezan Shira & Associates, a foreign direct investment practice providing legal, tax and business advisory services to foreign investors in China, India and Vietnam. The firm was established in 1992 and maintains nineteen offices throughout the region. Please visit the practice at www.dezshira.com or download the firm’s brochure here.

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