VZCZCXRO6400
RR RUEHCHI
DE RUEHBK #4888/01 2220517
ZNR UUUUU ZZH
R 100517Z AUG 06
FM AMEMBASSY BANGKOK
TO RUEHC/SECSTATE WASHDC 0846
INFO RUEHCHI/AMCONSUL CHIANG MAI 2275

UNCLAS SECTION 01 OF 03 BANGKOK 004888 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958, AS AMENDED:N/A 
TAGS: ECON ETRD TH
SUBJECT: A NEW CHINESE EXPORT 
 
¶1.  Summary: Emerging as the sixth largest source of engineering 
contractors in the world, China's construction industry is seeking 
to increase exports of these services to Thailand.  An experienced 
Chinese industry executive spoke candidly regarding his company's 
difficulties in navigating the disparate layers of Thai bureaucracy, 
asserting that Chinese construction firms are often outmaneuvered by 
more established Thai and foreign firms.  However, others have 
complained the companies receive undue support from the Chinese 
government, including low-interest loans and direct grants. 
Finally, it appears that most members of Thailand's construction 
industry support caretaker PM Thaksin Shinawatra's government, as it 
provided political stability and maintained important existing 
contacts.  End summary. 
 
¶2.  As a close neighbor and a large developing market in Southeast 
Asia, Thailand has attracted the attention of Chinese construction 
firms as a destination for increased service exports.  Currently the 
world's sixth largest exporter of engineering services, China's 
construction firms have relatively extensive foreign operating 
experience.  At the 2006 Global Construction Summit in India, deputy 
president of the China International Contractors Association 
(Chinca) Diao Chunhe said Chinese firms in 2005 reached a record 
turnover of USD 21.76 billion globally, a 24.6 percent increase from 
¶2004.  New contracts signed by Chinese contractors in 2005 totaled 
USD 29.6 billion, also up 24.2 percent.  Moreover, one 
Thailand-based Chinese industry source noted that the Chinese 
Ministry of Commerce has facilitated a shift from mostly African and 
Middle Eastern projects in the 1980s to increased emphasis on 
countries bordering China, including Southeast Asia, Mongolia and 
Russia. 
 
A Chinese old Thai hand 
------------------------ 
 
¶3.  Despite a growing international market and support from China's 
policy-makers, one Chinese executive fretted that Chinese 
construction companies still have difficulties in penetrating the 
Thai market.  During a candid July 5 meeting, Mr. Wang Yinfei, 
managing director at China State Construction Engineering Company 
(CSCEC), provided Econoff with his perspectives on the evolving 
Chinese business and investment strategies in other countries.  Wang 
is rare among prominent Chinese business leaders in that he is 
relatively young, well-experienced overseas and conversant in 
Chinese, Thai and English.  Graduating from Shanghai's prestigious 
Fudan University, Wang first arrived in Thailand as a middle manager 
in 1988 for CSCEC. Since then he has spent all but one year living 
in Bangkok.  His company was a founding member of the Chinese-Thai 
Enterprises Association, where Wang served as its first president. 
 
¶4.  Wang described the difficulties in receiving contracts in 
Thailand, a process of building personal networks at multiple levels 
of every ministry's staff and navigating through a complicated 
system of regulations.  Wang claimed on certain projects Thai 
companies influence ministers to block competitors by withholding 
upgrades of technical rating certifications, necessary for larger, 
more lucrative contracts.  This practice also infiltrates bid 
evaluations, which are divided into two categories: price and 
technical expertise.  Although the different bid values are open, 
Wang deemed the technical evaluation an arbitrary process that often 
depended on "personal connections", where Thai and more established 
foreign firms excel.  Other limitations are requirements for 
joint-venture partnerships with Thai companies under Thai government 
procurement regulations.  Mr. Lu Jiongtao, managing director for 
Chinese hydropower company CWE, noted that all of his company's 
projects required a Thai company as lead bidder.  (Note: Chinese 
construction companies circumvent this by legally establishing 
themselves as Thai entities. End note.) 
 
¶5.  Wang also noted that corruption is endemic in the construction 
industry, a problem confirmed by Thai contractors as well.  Still, 
all parties seemed to accept this condition as a standard operating 
expense. Mr. Thamnu Vasinonta, executive director for the Thai 
Contractors Association said he disliked the current practices of 
bribery, but interestingly not its principle.  "A bribe should not 
be an assumed cost of doing business," he said, "but more like a tip 
companies give to show appreciation after the bidding."  He implied 
that better government 'service' to efficiently award contracts 
deserved a bigger 'tip', and vice versa. Wang also conveyed that 
CSCEC also had to adapt to this reality, and one must "brainwash" 
away any notion of legal and administrative ethics.  "You can't come 
to Thailand and expect to change the society," he remarked.  Wang 
even joked about the relative transparency of corruption; the amount 
of the bribe is rarely arbitrary, but a similarly fixed percentage 
of the contract value. 
 
Chinese construction companies: Pups or Wolves? 
--------------------------------------------- --- 
 
¶6.  Despite these difficulties, Chinese construction firms and other 
service exporters have aggressively increased their presence in 
Thailand.  Aside from the large communications company Huawei, BoI 
China desk director Mr. Charas Chitkittichamras listed construction 
firms CSCEC, CHEC and CITIC as the most prominent players.  He 
 
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explained that thus far they have generally received contracts for 
public housing complexes; for more complicated "megaprojects", 
Chinese companies usually play minor roles as subcontractors. 
Charas suggested that the primary reasons include a relative lack of 
capability and poor understanding of Thailand's bidding process. 
 
¶7.  Since 2001 Wang said CSCEC has improved relationships with 
different RTG ministries, winning the prime contractor role on a few 
projects. Wang said that his company's largest current contracts 
include an 8.4 billion baht (USD 220 million) housing project with 
20,000 units and a 1 billion baht (USD 26 million) local government 
office tower, but he also added a 3.8 billion baht (USD 100 million) 
outer ring highway for Bangkok. He also confirmed other projects 
where CSCEC acted as a subcontractor, but he denied that CSCEC 
accepted subcontractor status because of any technical deficiencies. 
 Rather, he contended that his company wanted to avoid the 
complicated machinations in securing large projects from the Thai 
government. 
 
¶8.  Chinese companies have also started making inroads into 
contracts for pipelines and dams.  For instance, the Petroleum 
Authority of Thailand (PTT) recently chose Chinese Petroleum 
Pipeline Engineering Corporation (CPPE), a subsidiary of the China 
National Petroleum Corporation (CNPC), to build a 70 kilometer 
pipeline near Bangkok that leads to the Wang Noi power plant.  One 
Thai construction expert from U.S. engineering giant Bechtel 
confirmed the determination of Chinese companies to advance their 
own processes, materials and information.  For example, the Chinese 
CPPE subcontractor has asked Bechtel repeatedly for copies of 
information on unrelated construction projects.  "The Chinese are 
learning all the time," the Bechtel representative noted, "and 
they're learning quickly."  Eventually he expects these companies to 
be very competitive. 
 
¶9.  In almost every case, Chinese construction and service providers 
offer the lowest prices as their primary advantage, and Charas noted 
that sometimes their bids are half of its competitors.  Part of this 
advantage may stem from their tendency to use only Chinese 
suppliers, traders and even labor.  Andy Huang, president of 
Taiwanese construction firm Sunflower Group, complained about 
Chinese companies accepting smaller payments in installments, 
sometimes with no up front payment, because of PRC financial 
assistance.  CSCEC's Wang confirmed the practice, although his 
rationale differed from Huang's, citing his firm's more flexible 
payment option as a response to ministry budget shortfalls. 
 
¶10.  These activities have some observers questioning whether 
Chinese companies are playing fair.  For example, Charas believed 
that Chinese companies lack many of the technical capabilities to 
compete for major contracts.  However, the Bechtel source noted that 
Chinese companies are sometimes selected despite being less 
qualified than other competitors. He suggested that the PTT is 
"heavily influenced" by the Thai Ministry of Commerce, which in turn 
is susceptible to Chinese influence through inter-government loans. 
Although the evaluated Chinese bid on the pipeline project was the 
cheapest, CPPE had the weakest qualifications, material support and 
expertise.  As project manager on behalf of the RTG, Bechtel also 
has had to exert extra effort to administer the contract to ensure 
CPPE does not cut corners. 
 
¶11.  Wang freely acknowledged that the Chinese government has 
ratcheted up its support for outbound investments, including very 
low-interest loans and liberal re-import/export policies that 
allowed Chinese firms to transport their equipment and machinery 
from China to Thailand.  Even Thai contractor association 
representative Thamnu agreed that some level of outside influence is 
acceptable, but he balked at direct PRC loans to Chinese companies. 
That type of advantage would create overtly unfair bidding 
conditions.  As an alternative, Thamnu thought that the Chinese 
government should make more government-to-government loans for 
construction projects, with the caveat that Chinese companies 
receive preferential access.  He suggested that this would help to 
maintain fairness for existing projects while giving Chinese 
construction more opportunities for previously unbudgeted works, 
something of a win-win for everyone. 
 
Politics and the waiting game 
------------------------------ 
 
¶12.  Thailand's current political uncertainties have reduced the 
overall level of construction, particularly for public-funded 
projects.  Thamnu suggested that members of his organization, which 
is unaffiliated with any government or political entity, have 
watched both new and existing contracts halted.  Funding has crawled 
to a standstill as the government lacks power to approve new 
budgets.  Lu noted that CWE will have no new projects for at least 6 
months and can do nothing but wait.  Perhaps as a result, Thamnu 
expressed his personal view that the Thaksin government had been 
good for contractors. 
 
¶13.  Wang also believed most Chinese companies supported the current 
Thaksin government and the Thai Rak Thai (TRT) party because it 
generally advanced pro-business economic policies.  While 
 
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acknowledging Thaksin's special emphasis on Chinese trade and 
investment has been helpful, he said the primary reasons for growing 
Chinese business activities go beyond a cultural affinity with the 
large ethnic Chinese Thai business elite.  Wang liked Thailand's 
Buddhist mores, but political stability since 2001 has been the main 
draw for further trade.  This is magnified in an industry like 
construction that requires strong business-government relations.  He 
did not object to the opposition Democrat Party except for 
continuity's sake.  He gave an example of CSCEC's local government 
office building suffering delays and higher costs when the Democrat 
Party took power and demanded significant changes to the project 
design and materials. 
 
¶14.  Comment: The construction industry is an example of Chinese 
potential to expand their growing exports to Southeast Asia beyond 
traditional sectors involving cheap goods and agricultural products. 
 While China does not yet export highly-skilled services in finance 
or consulting, its low-cost construction SOEs may prove formidable 
competitors once they better navigate Thailand's construction 
networks.  We note that none of the Chinese construction firms 
discussed competing for private sector construction contracts 
despite their apparent pricing competitiveness.  End Comment. 
 
Arvizu