Fitting in is the biggest challenge

Localizing solves many problems for China Railway International joint venture in South Africa

Localization has become the strategy for Chinese project contractors as they look to expand in South Africa as a result of rising labor costs in China.

And that is certainly the case for China Railway International-Eagle Investments (Pty) Ltd. As it bides its time waiting for opportunities in infrastructure construction in South Africa, it has dived into the property development business. In doing so it hopes not only to make money but to establish a reputation locally for its commitment to the country and its people.

"Our operation here is totally localized," said Wen Jian, its deputy general manager and director, in his office in Johannesburg.

"Apart from a few Chinese management staff, employees at all levels are 100 percent local. As a newcomer, we were unfamiliar with the market and had to rely on local professionals."

The South African government's Black Economic Empowerment program requires a certain amount of local input, Wen said.

"South Africa is not the only place that has such requirements. They present a certain investment challenge, but we have to adapt to the local market. Of course if we relied 100 percent on input, equipment and staff from China we could save a lot of money. But failing to make any social contribution, including creating jobs and buying locally, would understandably upset locals and do nothing but tarnish the image of Chinese businesses."

Li Deqiang, financial manager of CRI-Eagle, sees localization as a "very effective driver" in doing business overseas.

"Chinese companies have to rid themselves of their traditional thinking and harness the benefits of relying on local input. There is no doubt that our growth in South Africa is based on just one principle: localization. If that were not the case we would be getting nowhere."

CRI-Eagle was jointly established in 2008 by the developer of Eagle Canyon Golf Estates, with a 49 percent stake, and a subsidiary of China Railway International Group holding the rest. As the overseas business gained more importance, the overseas branches and operations of China Railway Engineering Corp were incorporated into China Railway International Group last year.

"CRI-Eagle Investments' mission is to win business in project contracting through investment," Wen said. "It has been hard to break into South Africa's project contracting market, which is well developed and controlled by big local companies. The investment operation focuses on property development and mining."

In 2008, Li said, CRI-Eagle bought a site in Johannesburg for a low price and turned it into a golf course with adjoining villas, "and we made a lot of money".

The company's landmark development is Sandton Skye, 200 high-rise apartments in affluent Sandton, the business district of Johannesburg. Construction began in 2011 and is expected to be completed next month.

The company also owns a two-hectare plot near Nelson Mandela Square, also in Sandton, and plans to start building an office building there this year. The company's partner, Investec, an international specialist banking and asset management group, has already leased 20,000 square meters of the development to a law firm.

"In developing property, we used to do what is done in China: build first and then sell," Wen said. "But doing things that way the investment was onerous, financing costs were high and local banks were unwilling to finance our projects. In addition, home loans are subject to currency losses owing to the depreciation of the rand.

"So we changed our approach, deciding the best thing to do is to form partnerships locally. In this overseas market we have limited resources and are unfamiliar with buyers. Our company will generally be unfamiliar to those thinking about leasing our properties, but our partners' reputations will be familiar to them."

The joint venture investment is "not bad in that it supports daily operations and will produce a profit" despite currency problems, Wen said.

"Our investments are part of a strategy of building a reputation and showing that we are committed to the local market with high-end products. Our ultimate goal is to win infrastructure contracts, including building airports, and renovating the railway transport network and ports. Whenever opportunities emerge, we will be there to grab them."

Prospects in South Africa's infrastructure construction market are promising, he said, including estimates that $10 billion will be spent to upgrade the railway freight network over the next five years.

Chinese technology is also in high demand, he said.

As Chinese project contractors go abroad, encouraged by the government, some fail to live up to their obligations regarding corporate social responsibility and this has tarnished the reputation of Chinese business, Wen said. "A lack of corporate social responsibility is the most obvious failing of Chinese companies in overseas markets."

Until five years ago, Chinese companies enjoyed the benefit of low costs, but with rising wages in China that advantage has evaporated, making the cost of buying and maintaining Chinese equipment much less competitive, he said.

"African countries have developed their own construction companies in recent years, and any foreign company needs local input."

Failings in corporate social responsibility center on making little contribution to local employment, causing environmental damage, he said.

"The big costs are usually not incurred in construction but in things like environmental protection."

Compared with Western rivals, Chinese companies are less committed to social responsibility, he said.

CRI-Eagle devotes about 10 percent, or about 1 million rand ($93,560), of its annual revenue to CSR activities, including donations to schools and training staff, Wen said.

The joint venture has created more than 3,000 jobs in Johannesburg, ranging from cleaners to project managers, he said.

But the devaluation of the rand is the main disadvantage for Chinese companies in South Africa at the moment, he said.

"The Chinese government should strategically support Chinese businesses going overseas so that they can become highly competitive. Approval procedures need to be simplified and sped up, and subsidies, with the appropriate checks for risk, should be increased."