The Chinese infrastructure sector is becoming increasingly attractive for Western service providers, driven by a rapidly growing market, increasing appetite to use foreign infrastructure firms and the rising importance of value-based differentiation.
However, multinational (MNC) service providers operating in the infrastructure industry in China are still marginalised. Historically, the Chinese market has been tightly protected by government legislation, which made licences extremely hard to obtain – impossible in certain sectors.
For the MNCs who have overcome these regulatory obstacles, the contract estate is still made up of relatively short-term contracts,which do not give these companies the margin opportunities they are used to in their home markets.
As a result, China has become primarily viewed by infrastructure providers as a series of small opportunities rather than the step-change many were predicting five years ago.
Is change afoot?
In the public sector, the answer is probably not. This protectionist environment is likely to continue, given the Chinese government’s preference to use state-owned enterprises or local companies, due to their willingness to work on shorter term contracts.
However, in the private sector the outlook is decidedly more positive. There are likely to be some big infrastructure winners over the next three years in China given a combination of:
– Strong market growth, driven by the Chinese service market catching up with more developed nations. This economic trend, coupled with an increased focus on the quality of execution as Chinese service expectations rise, is driving both market opportunity and the MNC’s ability to win versus local competition.
– Weak competition: currently, local providers in most B2B service sectors including infrastructure (with the exception of state-owned enterprises) are both sub-scale and highly fragmented. This shortage of local expertise will provide huge opportunities for MNCs.
– There is likely to be a reduced reliance on state-owned enterprises, as there is greater acceptance to move away from these companies in the private sector. Infrastructure projects are fast heading in this direction too.
– Chinese buyers are increasingly willing to pay for value-added services across service industries. For the infrastructure sector, this means non-price based competition.
We have also seen the emergence of different types of contracts coming to market, providing foreign infrastructure providers with increasing margin opportunities and defensibility
Sodexo is a good example within the FM space of a company which has been seeingdouble digit growth in China for the past three years, as it has continued to deliver more integrated technical services through long-term agreements. For example, for Baosteel, Sodexo provides bundled multi-technical FM services across four sites. It has also established significant traction across Business and Industry (Nokia HQ), Healthcare (Fuxing Hospital, Beijing) and Education with contracts serving over 10,000 people.