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Executive summary
This report presents a strategic position of the Chinese Communication and Construction Company in China. The company was established by the mergers of two leading construction companies. CCC is a vertically integrated construction business. A wide range of services have been provided by the company including infrastructure design and construction, port machinery and dredging. The company has a monopolistic position in many sub segments of the construction sector. The report applies the porter’s five force model which evaluates various political, social, economical and environmental impacts on the business growth. The SWOT analysis has been carried out to present the strengths and weaknesses of the company. The finance of the company is presented with the income and cash flow charts. At the end a comprehensive conclusion has been drawn along with a few recommendations to the company.
1. Background and introduction
CCCG, a Chinese communications and construction group was established by the merger of two business groups CHEC (China Harbour Engineering Company) and CRBC (China Road and Bridge Corporation) in December 2005 (CCC, 2012). These two companies have the history of more than 50 years in the business of infrastructure construction and design. Both companies have acquired specialization in the construction field as a main domain in their area of operation. The competitive and strategic position of the company can be assessed by the management tools including SWOT and PESTLE analysis (CCC company profile, 2012). The five force model of porter is used to analyze the influence of various forces on business strategies. The strategic direction of the company has been influenced by various technological, social, political and economical factors. CCCG is a vertically integrated and a full service construction group in China. A wide range of services have been provided by the company including dredging, infrastructure construction and the manufacturing of port machinery. Most of the sub segments of the sector of construction have been covered by the business of CCC which has a monopoly in some of the entities. The company is ranked as a leading bridge and road design and construction company of China. The projects undertaken by the company involve bridge designing, roads construction, tunnel erections and railways. Considering the port design sector, CCC is found to be a largest Chinese company. About half of the dredging capacity of china has owned by CCC which makes the company the largest dredging entity in China (Daniel, 2007). The company owns an experienced workforce which has enabled it to use advanced equipments and technology (CCC Company’s data, 2012).
2. Leading Market Positions
There are four main categories in which the business of CCC can be divided including port machinery manufacturing, infrastructure design and infrastructure construction.
2.1. Infrastructure construction business
The data of 2011 illustrates that the company had about a 64.9 percent turnover in the preceding year. There are about 15 subsidiaries with their respective associates and units for the operation of CCC’s infrastructure construction business (China Communications Construction Co. Ltd. Annual Report, 2011).
2.2. Infrastructure design business
CCC provides a complete range of designs through their top ten tier design units for ports and bridges and road projects. The company also offers planning and consulting services, engineering surveys, feasibility studies, engineering consulting, project management, technical studies and other services. The total turnover from these services is found to be 5.3 per cent in 2011 which is Rm44 billion. The following table shows the market share of the company in comparison with the other leading companies of China (China Communications Construction Co. Ltd. Annual Report 2011).
Figure 1 CCC market share: source (China Communications Construction Co. Ltd.
Annual Report 2011)
2.3. Dredging business
The reports of 2011 show that, on the basis of capacity, CCC is the largest dredging company in China and the third largest company in the world. The company provides a comprehensive service of reclamation and dredging through three subsidiaries of CCC in China and overseas (Guo and Yong, 2006). This division of business has posted revenue of 68 billion in 2011, which accounts for 8.1 per cent of the total turnover of the company in China (China Communications Construction Co. Ltd. Annual Report 2011; Kwan et.al, 2011).
2.4. Port machinery manufacturing business
The two subsidiaries of CCC including ZPMC and SPMP have positioned the company as one of the largest machinery manufacturers with a specialty in port services (Guo and Yong, 2006). ZMPC has about 74.3 per cent of the market share and been listed by the stock exchange market of the Shanghai as the largest crane manufacturer in the world. The other subsidiary SPMP deals with the manufacturing of bulk handling machinery at a domestic level. The revenue generated by the port business of the company accounts for 16.5 per cent of the total value (China Communications Construction Co. Ltd. Annual Report 2011).
2.5. Other businesses
The other business dealt by CCC includes the construction of roads and bridges, manufacturing of machinery, trading of construction materials, logistic services and equipments. Combined revenue of about 5.2 per cent has been achieved by the other businesses of the company in 2010 (Kwan et.al, 2011).
3. Market share and competitive position
The company’s market share compared to competitors is illustrated in the following table
Table 1 competitors market share: source (China Communications Construction Co. Ltd.
Annual Report 2011)
4. Who are the customers?
The business has been expanded to the markets at global level. The major overseas countries include Africa, Southeast Asia and the Middle East as the major consumers. The market leadership of ZPMC at global level has made the port machinery manufacturing business of the company stronger in overseas countries (Sachs, et.al, 2007; Shen, et.al, 2001). The company has sold its products to more than 53 regions and countries including America, the Middle East, Europe and Asia Pacific. The following table shows the major buyers of the company’s products.
Table 2 the customers of CCC
5. Influence of external environment
The construction strategy of the company can be analyzed in the light of external environmental impacts. The PESTLE analysis has been conducted in this section to evaluate the external construction environment.
5.1. Political
The construction industry has been effected by the Chinese government policies e.g. environmental issues and planning for the achievement of sustainable development. The changing national policies including energy, housing, and education and funding for local infrastructure projects affect the construction industry (Raftery et.al, 1998).
5.2. Economic
The varying interest rates and economy of the country has affected the overall demand of infrastructure construction. The ability of the Chinese government to invest in the construction projects has been influenced by the public deficit (Zou et.al, 2007). The availability of private funds and the interests of Chinese government to invest in fiscal stimulus have greatly affected the construction business.
5.3. Social
The social factors that affect the infrastructure business include demographic changes, changes in working patterns of China market, changes in working potential of workforce and rise in the level of unemployment. China communication and Construction Company has been largely effected by the varying behaviours of people and skilled workforce. Increasing crime rate and immigrations has influenced the industry significantly (Shou, 2007).
5.4. Technology
The development of new construction technologies also affects the construction company. Production of equipment is preferred in factories rather than on site. Modern methods of construction and requirements of zero carbon have increased the challenges for the industry (Wang et.al, 2004). Intelligent buildings with energy efficient infrastructures are being developed to cope up the modern world.
5.5. Legislation
The Chinese government has implemented the policies for the highly fragmented construction industry. China communication and construction group has found that the business’ performance can be improved only if government increase the legislation for safety and health practices, tax reforms and lending the credit insurance or finance at private level (Zeng et.al, 2003).
5.6. Environment
China communication and construction industry has developed the strategies for the construction of zero carbon infrastructures. The company has developed codes for sustainable buildings and green technology.
6. SWOT analysis
6.1. Strengths
The company has a proven record of the 50 years service in China and 25 years experience in overseas countries with the developing business of infrastructure construction. Being a largest design and port company in China, CCC has been found to be involved in almost all major construction projects (Hubert, 2007). The company is the largest dredging business in China and the third largest entity in the world in respect of the capacity. The company has about 265mm3 dredging capacity which accounts about 50 per cent of the Chinese total dredging capacity.
6.2. Opportunities
The company has used its leading position in the world to grow its businesses by increasing investments in the sector of infrastructure construction. In 2011 the company has invested in nine contracts by the net aggregate of Rmb9.0bn (China Communications Construction Co. Ltd. Annual Report 2011). After the approval of the government, the company has invested in railway deals including tracks from Wuhan to Hefei and Taiyuan to Zhongwei. There are many opportunities for CCC to invest in the projects of BOT (Hui, 2007). The structure products of steel by ZPMC have also found to be on growing trend in the Chinese market.
6.3. Weaknesses
When compared with the international peers, CCC may have a lower margin for its infrastructure construction business. The lower margin in some contracts is due to the governmental issues as these are more rigid in planning and pricing. The overseas exposure of the company has subjected it to the currency fluctuation issues in foreign markets. Various projects of the company are also subjected to the liquidation damage because of their inability to meet the deadlines according to schedules (Jiangzhong, 2007).
6.4. Threats
The profit margins of the company have been reduced by the increased costs of the raw material. The fixed price strategy of the company has reduced its profit margins. The price fluctuations in many projects use the escalation formulas to accommodate the price variations (Jihong, 2007). However these formulas cannot fully recover the reduction in profit and impact the volatility of the price greatly. The dredging business can experience the lower profitability values due to the higher costs of the fuels. Capacity constraints also have a negative impact on CCC which allows the short run of the sub-contracts and thus reduce the profit margins (China Communications Construction Co. Ltd. Annual Report 2011).
7. Porter’s 5 Competitive Forces Model
7.1. Bargaining power of suppliers
The suppliers of CCC have found to have a lasting relationship with the company. The market movements allow the fluctuations in the prices of services and materials which causes the suppliers to adjust their prices according to the market change.
7.2. Potential Entrants
Threat of new entrants
Being a heavy capital intensive, the measures of austerity has been proved to be a hurdle for CCC to enter in the new markets. There are various variables including the quality of work, advanced technologies, high-level qualification, industry expertise, adequate equipment resources, proven track record and production capacity. These variables are the main reasons to discourage the new entrants in the construction market (Kwan et.al, 2011).
7.3. Industry Competitors
Rivalry among existing players
In China the CCC is found to be the largest player in the businesses of construction and design. However a fragmentation in the construction market of roads and bridges has been observed. The company has big competitors with other state owned entities. The subsidiaries like ZPMC and SPMP are working at a global level and competing with their rivals. The position of ZPMC has enhanced the competitive position of the company.
7.4. Substitutes
Threat of substitutes
The company has low substitution threats because of the high knowledge and expertise of the company, higher requirement of the capital, the need of a high quality work and capacity constraints.
2.5. Buyers
Bargaining power of customers
The qualified bidders are free to choose tenders for the numerous infrastructure projects. The recommendations made and the submitted proposals made the bases for the evaluation of the bid. The company focuses on quality of the product, suppliers, price, product design flexibility, schedules of transportation and the past record of the suppliers before making the deals (PhilCo, 2007).
8. Finance
The company can have a strong growth by investing in new orders. The solid growth requires governmental spending strategies on infrastructure construction, realized synergies and favourable conditions at macro and micro economic levels. CCC has maintained the flow of their orders by implementing effective business strategies. The total contract investment of the company was 45.8 per cent in 2006 and increased to the 33.1 per cent in 2007 (CCC financial data, 2012). Backlog orders have the growth of 27.9 per cent in 2006 and increased by 28.7 per cent in preceding years. The following graphs show the trends of the company’s finance from 2008 to 2011 (China Communications Construction Co. Ltd. Annual Report, 2011).
Table 3 segment breakdown of revenue, profit and profit margins, source: China Communications Construction Co. Ltd.
Annual Report 2011
Figure 2 CCC revenue, source (China Communications Construction Co. Ltd.
Annual Report 2011)
Figure 3CCC net income: source (China Communications Construction Co. Ltd. Annual report)
9. Issues
- The company’s growth can be dragged down due to the slow economy of the country and governmental spending strategies on construction projects.
- The fluctuation in the trading activities of China with European and U.S. economies has significantly slowed down the company’s growth.
- The delays in the completion of projects can also result into the lower productivity of the company. The major reasons for project delays are poor weather conditions (Lu and Wang, 2004).
10. Conclusion and recommendations
The highly capital intensive businesses of CCC has made the company dependent on operating capacity and efficiency trends. The pre-defined contract schedules make the most of the projects conducted by CCC highly time sensitive. The profitability of the company’s projects has been found to be hampered by the liquidated damages significantly. The study presents few recommendations including;
- The company should prefer to use advance technologies and equipments in order to complete the projects and provision of high qualities.
- CCC should develop the strategies to educate and train its employees to work in the western markets as well.
- The company should encourage the programs regarding safety, environment and sensitivities of human rights.
The company has plans to invest more 20 per cent in IPO and 33 per cent Capex for the expansion of the available capacities in infrastructure construction business (China Communications Construction Co. Ltd. Annual Report, 2011).
References
- Daniel Qu, (2007) “Chinese Construction Market – The Owner’s Perspective” (power point, Tsinghua University, Beijing, China, July 19, 2007.
- Guo, Yong, (2006) ‘National Integrity System, Transparency International Country Study Report, China 2006’ Transparency International
- Hubert Vaughan, (2007), “Corporate Management and Project Management Practices” (powerpoint, Tsinghua University, Beijing, China
- Hui Zhao, (2007) “The opening of Construction Industry of China to the outside world” (powerpoint, Tsinghua University, Beijing, China
- Jiangzhong Lu, (2007), “Chinese Contractors’ Overseas Expansion” (powerpoint, Tsinghua University, Beijing, China
- Jihong Wang, 2007, “Chinese Construction Market Approaches Internationalization” (powerpoint, Tsinghua University, Beijing, China, July 19, 2007).
- Kwan, Ang Yee, Ofori, George (2011), 'Chinese culture and successful implementation of partnering in Singapore's construction industry', Construction Management and Economics, 19:6, 619 – 632
- Lu, You Jie; and Wang, Shou Qing, (2004) “Project Management in China,” Southeast Asia Construction, Issue Sept/Oct 2004 pp.158-63 (English Edition)
- PhilCo Wong, (2007) “Foreign Contractors Penetration into China (Section I)” (powerpoint, Tsinghua University, Beijing, China
- Raftery, John; Pasadilla, Bernie; Chiang, Y. H.; Hui, Eddie C. M./ and Tang, Bo-Sin, (1998) 'Globalization and construction industry development: implications of recent developments in the construction sector in Asia', Construction Management and Economics, 16:6, 729 - 737.
- Sachs, Tillmann; Tiong, Robert; and Wang, ShouQing (2007) “Analysis of political risks and opportunities in public private partnerships (PPP) in China and selected Asian countries: Survey Results,” Chinese Management Studies, Vol. 1. No. 2, 126-148.
- Shen, L. Y.; Wu, George W. C.; and Ng, Catherine S. K. (2001), “Risk Assessment for Construction Joint Ventures in China,” Journal of Construction Engineering and Management, January/February 2001, 76-81.
- Shou, Qing Wang, (2007) “Infrastructure Development PPP in China and Lessons Learnt,” (powerpoint, Tsinghua University, Beijing, China
- Wang, Shou Qing; Dulaimi, Mohammed Fadhil; and Aguria, Muhammad Yousuf (2004) 'Risk management framework for construction projects in developing countries', Construction Management and Economics, 22:3, 237 - 252
- Zeng, S.X.; Tam, C.M.; Deng, Z.M.; and Tam, Vivian W.Y., (2003) “ISO 1400 and the Construction Industry: Survey in China,” Journal of Management in Engineering, 107-115.
- Zou, Patrick X.W.; Fang, Dongping; and Wang, Shouqing, (2007) ‘An overview of the Chinese construction market and construction management practice,’ Journal of Technology Management in China. Vol. 2, No. 2.
Websites
- CCC Chinese communication and construction group, financial data, available online at http://markets.ft.com/research/Markets/Tearsheets/Financials?s=601800:SHH, retrieved on 26, 11, 2012.
- CCC, company profile, available online at http://www.reuters.com/finance/stocks/overview?symbol=601800.SSretrieved on 26, 11, 2012.
- CCC, company’s data, available online at http://www.bloomberg.com/quote/1800:HKretrieved on 26, 11, 2012.
- China Communications Construction Co. Ltd.Annual Report 2011, available online at http://asia.cdn.euroland.com/arinhtml/CNCYY/2011/AR_ENG_2011/index.htm#top, retrieved on 26, 11, 2012.
- China Communications Construction Co. Ltd. available online at, http://en.ccccltd.cn/, retrieved on 26, 11, 2012.
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