China growth strategy: sizing the opportunity and designing the route to market
PROPERTY, INFRASTRUCTURE & CONSTRUCTION · GROWTH STRATEGY · MARKET ENTRY
The situation
A global construction and project management business had been operating in mainland China for several years at a scale that did not matter to the group. The board wanted a tenfold increase in profit inside five years, a gross project margin of A$50 million, and it set hard conditions on how that was to be found. Growth had to come from mainland China, from property and related services, from revenue rather than cost reduction, with capital outlay under A$100 million, and from opportunities that did not depend on deploying a global strategy or capability into the market. The answer had to be earned in China rather than imported.
The constraint was access rather than appetite. China was building at around US$335 billion a year and taking roughly US$60 billion a year of foreign direct investment, so the market was plainly there. The business, though, was selling locally to buyers who were not making the decision. In industrial construction the choice sits with the project engineering team in the client’s home country, and the China country manager influences follow on work at best. Regulatory limits on wholly foreign owned enterprises put most government funded work out of reach without a local partner. And the projects being won were too small to move the number even if the business won more of them.
The work
Retained to run the strategy across three phases, we sized the opportunity, narrowed three strategic options to one, and built the implementation path. Five strands:
Sized the accessible market rather than the market. Of around US$60 billion a year in foreign direct investment, we isolated the share flowing into sectors where the business could genuinely compete and where western investors controlled the construction decision. That came to US$5.5 billion of construction expenditure in 2004 rising to US$9.7 billion by 2011, or roughly $437 million of market profit at a 4.5 per cent margin. The same treatment was applied to the domestically funded construction market, where a ten per cent addressable slice of US$335 billion supported a separate project management services play worth around $215 million of market profit.
Researched the two target markets in depth. Industrial foreign investment was analysed sub sector by sub sector, with automotive, electrical, chemicals and plastics, and food processing targeted, and steel and metals, petroleum processing, textiles, clothing and footwear ruled out on attractiveness or capability fit. Property investment was analysed separately, where international investors were materially underweight Chinese real estate against a risk weighted share of about US$180 billion, implying more than US$140 billion of additional investment over a decade and $5 to $10 billion a year of construction expenditure.
Mapped buyer behaviour segment by segment, which is where the strategy actually turned. For industrial work the decision maker is the offshore project engineering team, not the country manager, so a China sales force cannot reach the buyer no matter how good it is. For investor work the route runs through developers and development joint ventures rather than the funds themselves. For government funded work the regulatory position on wholly foreign owned enterprises makes a local joint venture a precondition rather than a preference.
Assessed every access option against three tests: does it provide access, is it viable, and does it add to the offering. Acquisition of a local competitor, a specialist foreign builder, an engineering firm, a local developer, a design institute or a local contractor. Partnering through an offshore engineer, a development joint venture with a foreign fund, or a local design institute or contractor. Building a China sales, development management, retail planning or project management capability. In the industrial segment one option cleared all three tests, an offshore engineering partner in the United States or Europe supported by a local sales presence, and the analysis said so plainly rather than presenting a menu.
Built the financial case and then tested it to destruction. Market share and margin assumptions were set segment by segment and converted into deal counts and project profiles, with bid costs at an assumed one in three success rate, staffing, office overhead and a tax rate rising from 15 to 33 per cent. Sensitivity analysis showed that one percentage point of market share was worth about A$9 million and half a point of margin about A$5 million, so the plan went to the steering committee with its own fragility on the page.
Four staged roadmaps were then written, one each for industrial, retail, commercial and project management services, running from late 2006 through to 2009, together with a summary roadmap and a responsibilities schedule naming a lead and a doer against every task with a date.
The outcome
A base case of A$37 million in gross project margin and A$16.3 million in profit after tax by 2011, rising to A$43.1 million and A$20.3 million with integrated group participation, and a business mix diversified across four segments rather than concentrated in one.
A deal profile shifted decisively upwards, from small work to projects of US$50 million to US$500 million across semiconductors, automotive assembly, chemicals and plastics, food processing and packaging, new build and refurbished retail, offices and mixed use, with hospitals, airports and rail carried as a longer dated project management play.
One access strategy per segment rather than a general intention to try harder. An offshore engineering partner for industrial work, developers and development joint ventures for investor work, and a local joint venture for government funded project management, each with a staged roadmap, named owners and dated milestones through to 2009.