A look at China through real assets: real estate and infrastructure

Our last few days in China were spent meeting Shui On and Rio Tinto (among other companies including Control Risks and Trayton). Both meetings provided us a look into China through the prism of hard assets and infrastructure export investments.  Both meetings provided us some interesting anecdotes about these two industries in China.

Shui On is a property development, construction and construction materials business operating in Hong Kong and mainland China. They are currently focusing on city  core development, on building communities, transit based construction (i.e. subways) as well as development as it relates to the buildout of high speed train service throughout China. They were responsible for the Xiantiandi development, which is a popular tourist attraction in China. Harkening back to Shanghai’s historical roots, Xiantiandi is an area of reconstituted traditional shikumen (“stone gate”) houses on narrow alleys, some adjoining houses which now serve as book stores, cafes and restaurants, and shopping malls.

XintiandiStreet xintiandi1xintiandi4

We as a group walked this area on one of our free nights in Shanghai and loved the many restaurants and cute stores we found along the alleys. Really impressive was that it was constructed in 6 months (this not only includes the streets, shops and restaurants but also residential and office properties, a 200 car underground garage and a lake!!).

To this point, the speed at which things can get developed in China has just been remarkable for us to see and understand. Cheap and abundant labor is surely a source of this capability, but so is the one-party system. As the head of procurement at Rio Tinto pointed to, things can get pushed through in China must faster than in other countries where democracy can slow down development (take India for example). Approvals go straight up one chain in China.  In particular if a project reinforces the goals stated within the Five Year Plan, or even local government plans, the speed at which the Chinese can turn around projects is lighting fast. In addition to Xiantiandi, another example we could reference from the trip  is the China Ting lobby and fashion show theater, which was build over a weekend! The efficiency of decision making in China is surely something the United States and other more developed countries can learn from China. Further, according to Shui On, China will be urbanizing the equivalent of the entire US population in the next 25 years. Again, the capability to accomplish such a feat is endemic to China and the way it does what it does! (Interestingly, the urbanization phenomenon will result in a more homogenous China population, with disparate dialects and cultural nuances blending together, most likely towards that of Shanghai).

The meeting with Shui On also taught us that attitudes about development are shifting towards thinking about sustainable and clean development. The conversation has gone from “more cars!” to “less cars!”, “more properties!” to limiting the number of property investments individuals can make. We noticed that most of the buildings in which we had meetings were LEED certified, a surprise given the stereotypes we hear about China’s development. Nevertheless, one major issue stemming from the huge build out of real estate (beyond issues of sustainability and the potential real estate bubble) is the immense pressure developing on the low income population. Most of the housing in development has been for high and middle income earners. To relieve some of this builtup pressure, developers are now being forced to build low income housing.

Shifting gears, our meeting with Rio Tinto focused on the procurement side of Rio Tinto’s business (not the commodity sales business). The China office is responsible for sourcing from China for the export markets. For example, they sourced XEMC to be a supplier of trucks to the export markets (an Chinese export for the first time in this industry).

China’s capability to export generally is expanding. The speaker at Rio Tinto likened China to 1960’s Japan, when the country was in a quality / price trade off. For China, investments will lead the way towards quality in the next few years. China is investing in technology (it will be the largest importer of industrial robots soon), building infrastructure, is capable of quickly forcing decisions through, and is serious about improving industrial safety (which is an explicit goal stated in the Five Year Plan). While they are building their export capabilities in Africa in particular, China (as discussed in a previous post) will still be doing things the “Chinese way”. In the case of export investment in Africa, this means two downside effects. One is that China is willing to invest in Africa with a “no strings attached” policy, foregoing an opportunity to incentivize poor and weak governments to invest in schools etc in exchange. Two, is that the Chinese dont make efforts to create local employment, again a missed opportunity for China to exert its power and stand for “bigger and better” things. However, given how fast China has shifted from being a low-cost player, to one that is attempting to be a good quality player, I see the future as one where China will also stand for something beyond itself in the international business arena.

Marianna Zaslavsky 13′

(Photo credits: www.chinavisitorcenter.com and shuion.com)

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