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Esther Galiana, Professor of Economics, University of Navarra, School

Kung Fu and the railroad

Sat, 20 Mar 2010 15:04:30 +0000 Published in Expansion (Madrid)

Some readers may remember the Kung Fu series where David Carradine wandered like a lost soul through the Wild West running away and doing good. I only intend to recall a few scenes where our Shaolin monk joins Chinese compatriots building railroad tracks.

This seemingly bizarre scene only reflected the reality of that time, when thousands of Chinese laborers migrated to the United States to work on the railroads and in other activities, especially in the California area.

We may be on the verge of a somewhat similar phenomenon in the West today, with the entrance of large Chinese construction companies. For the past few decades, China has been making a powerful incursion of its companies outside its borders, especially in Africa. China has exerted its influence in Africa through international trade, government aid and foreign direct investment in the continent.

This Sino-African relationship has its explanation: what does Africa have that China does not have? Natural resources in abundance. What does China have that its southern partner does not have? Financing, higher skilled labor and technology. China's international financial aid is provided through soft loans, attendance technical, and other measures. This has allowed China to play an important role in the development of the region's infrastructure, especially in energy, telecommunications and transportation. And, as in the United States "in the time of Kung Fu", when you go into certain African countries it is relatively easy to find Chinese workers on construction sites where you would expect to find locals.

In the Fortune 500 ranking, six Chinese companies are among the 15 largest construction and engineering companies in the world. Of course, four Spanish companies are also on the list: ACS, Acciona, Ferrovial and FCC. But until recently, Chinese companies, with heavy state ownership, operated mainly in their home market and in regions such as Africa, Asia, the Middle East and Latin America. The problem is that now it seems that their international strategy is to expand in regions such as Europe and the United States.

What competitive advantage do they have over skill? Probably the economic factor is the one that plays most in their favor. They are able to present a global proposal which, in addition to the project itself, combines the economic financial aid with the technical attendance , so that the conditions are sufficiently attractive for a government to lean in their favor. Especially in the case of Eastern European or Latin American countries.

Different attitudes

Faced with a new competitor, there are different attitudes: 1) hope that the threat does not materialize; 2) imitate its competitive advantage as far as possible; 3) prevent its expansion by lawful means; or 4) perhaps try to form a strategic alliance (the well-known "keep the enemy close"). The first attitude is ostrich-like and, therefore, not very advisable.

The second option requires a self-analysis of business and its environment that can probably be translated into improvements, but in the end it will have to be recognized that the Chinese competitive advantage is not directly replicable for a Western business . The third option is to try to curb the invasion through legal and regulatory barriers, demanding strict compliance with labor and environmental standards, denouncing anti-competitive practices, ... so as to compete on a level playing field.

The fourth strategy involves creating strategic alliances or agreements with these companies to bid for tenders in our markets goal. But not only that, this alliance can also be a possible entrance to one of the largest markets in the world by the hand of a local expert partner .

The World Bank has raised China's expected growth to 9.5% for 2010, so the domestic market is expected to experience strong demand, accompanied by an investment in infrastructure similar in absolute terms to that of 2009. This may represent an opportunity for non-Chinese companies, especially in these drought years, even considering the difficulties of doing profitable business in this country.

Returning to Kung Fu, his venerable master taught him the tiger style. This 2010 is the Year of the Tiger, a year of good auspices for entrepreneurs, which is much needed to face this complicated environment and these new competitors.