With total investment reaching CNY 100 trillion (EUR 12 trillion) in 2012, China’s construction industry will continue to grow quickly for the foreseeable future. The EU SME Centre says that although SMEs providing high-quality services in niche markets may find opportunities, there are still many obstacles preventing their full participation; domestic companies still have the lion’s share of the sector overall.

Currently China is constructing more than one third of all buildings worldwide, with additional living space amounting to the equivalent of a city like Rome appearing approximately every two weeks.

A recent sector report published by the EU SME Centre identifies a number of factors indicating that the sector will continue to be one of the main drivers of China’s growth. The situation might change in the mid to long term due to changes in demand and interventions by the Chinese Government, nonetheless, European SMEs offering high-quality products will find sustainable opportunities in selected niche markets.

Forecasts for selected indicators in China’s construction sector

Source: EU SME Centre report The construction sector in China

Controlled environment − the impact of government policy

The overall development of the market will depend strongly on future regulatory interventions by the authorities.

On the one hand, the nationwide campaign for continued urbanisation will ensure the construction sector remains significant to China’s overall economy in the coming years. By 2025 the government wants 70 per cent of its citizens to live in cities, which would entail a mass migration of 250 million people in the next 12 years, as well as massive efforts to provide housing and adequate infrastructure.

On the other hand, the desire to decrease the country’s dependence on public investment and increase domestic consumption could dampen the sector’s prospects in the long run. In addition, the government is keeping a close eye on the sector because of widespread speculation and fears of overheating and has repeatedly attempted to influence the market via macroeconomic adjustments in the past.

Government policy is also influencing the geographical distribution of construction activities to a certain extent. More than 85 per cent of revenue is still generated in the eastern metropolitan areas of the country, but because of governmental investment incentives, fast growth and large-scale infrastructure projects, western regions and second- and third-tier cities are quickly catching up. However, the largest markets for most European products remain on the eastern seaboard.

Home field advantage − domestic players own the market

As can be expected, construction is carried out almost exclusively by large Chinese companies, with private enterprises dominating the construction of buildings (81 per cent market share) and state-owned enterprises heavily involved in infrastructure projects (18 per cent market share). Foreign companies occupy a meagre one per cent of the market, a share which has actually been decreasing over the last five years.

The EU SME Centre report identifies three main factors that hinder Western companies looking for large-scale involvement in the sector:

Regulation

In many of the large subsectors within construction foreign, and even newly established Chinese companies, experience strong regulatory constraints. Licences for construction firms are especially hard to come by and new materials and methods are often prohibited due to the country’s limited ability to assess the benefits of their application.

Common business practices

As in many other sectors in China, being well-connected in business and politics is often more important than product and service quality. Because business is to some extent promoted through practices not acceptable to Western companies, advantages like higher quality, innovative products and established business processes are often not sufficient to level the playing field.

Price competition

More often than not price is the main factor influencing the decision making process of builders in China. As builders and buyers are usually not the same people, quality consciousness and total cost of ownership rarely enter the equation.

Fringe business − foreign companies in the sector

According to the report, foreign companies — including SMEs — will find opportunities mostly in upscale niche markets as Chinese consumers tend to associate European products with characteristics like reliability, modern design and innovation and are willing to pay premium prices for them.

Three trends in particular will increase demand for sophisticated European products in respective markets:

Labour efficiency

Due to increasing costs, builders are forced to pay more attention to labour efficiency. This will push demand for building systems like precast, equipment for building material production and general mechanisation, sophisticated and low maintenance building materials as well as training in corresponding processes and technologies.

Energy efficiency and green building

Energy efficiency is gradually becoming more important as well, with experts estimating that China will become the world’s largest market for green buildings by 2017.

The central government has set precise targets for energy saving and eco-friendly buildings. Although not yet a dominant feature in residential construction, many public buildings have to adhere to stringent energy norms and builders are implementing a large range of energy conserving or generating technologies.

This, in combination with the introduction of the Chinese Green Building Standard, is causing an annual growth rate of 60 per cent in the green building sector, compared to a general market growth of about five per cent. Opportunities for European companies include efficient lighting and heating systems, smart measuring and control systems, energy storing technology and retrofitting services.

A report specifically on the green building sector in China is available on the website of the EU SME Centre for free download after registration.

Design and quality

Because of rising disposable income levels and an increasing desire to live comfortably top-quality design products that help save space, are highly reliable and increase well-being will find improved sales prospects in the coming years.

European brand names are leading this movement, from revolving doors and ‘concrete accessories’ to sanitary appliances and designer furniture, European companies have been successful in building a niche and occupying a dominant market share.

While government intervention may cause the Chinese construction sector to experience fluctuations and the bulk of the market is dominated by Chinese enterprises the rapid changes in many aspects of Chinese society do create opportunities for companies that can offer high-quality products and services in specialised markets. However, despite high growth rates, entering the Chinese market remains an enormous challenge for European SMEs. It requires good planning, timing and an effective choice of business partner.

To find out more about this diverse market, download the report The Construction Sector in China, where you will also be able to find other related resources like case studies, guidelines and webinar recordings.

The EU SME Centre assists European SMEs by providing a comprehensive range of free, hands-on support services including the provision of information, confidential advice, networking events and training. The Centre also acts as a platform facilitating coordination amongst Member State and European public and private sector service providers to SMEs. The EU SME Centre is a project funded by the European Union.