This article first appeared in The Edge Malaysia Weekly, on March 13 - 19, 2017.

IT is apparent that Chinese state-owned companies are expanding their footprints in Malaysia’s construction sector. They not only undertake mega infrastructure projects, such as rail and skyscrapers, but also residential high-rises and landed properties.

This is causing concern among the local developers and contractors. An increasing number of them are feeling the pressure as jobs, including property construction, are not as many as it was during the property boom.

Some developers are not happy with the incentives like tax exemptions that are given to foreign players.

The number of projects has declined in the past two years and the project value has been flat at RM140 billion to RM150 billion, according to the Construction Industry Development Board.

Some industry players are hoping that the government will establish some regulations so that they will not lose more ground to the deep-pocketed Chinese contractors, who are said to be backed by Beijing.

“It is true that the influx of China-based contractors is giving stiff competition to local contractors and property developers,” Master Builders Association Malaysia president Foo Chek Lee tells The Edge, adding the appetite to engage Chinese companies has grown tremendously in recent years.

Citing Johor as an example, he says, several well-known local companies there are losing jobs to Chinese contractors.

No longer a level playing field

Real Estate And Housing Developers’ Association Malaysia president Datuk Seri F D Iskandar Mohamed Mansor says the current landscape of the local property industry is no longer a level playing field.

“Malaysia is an open market and welcomes any foreign investment that can boost its economy. However, while we endeavour to bring in foreign investments, it should not be done at the expense of the local companies,” he says, adding that the government should address this issue urgently.

According to Iskandar, foreign developers and contractors are given various incentives such as exemptions from bumiputera and affordable housing quotas, tax rebates, a five-year tax holiday and pioneer status.

Local developers, on the other hand, are imposed with a list of requirements, quotas and taxes.

Iskandar, who is also the CEO and managing director of Glomac Bhd, says he is concerned because Chinese developers are building on a massive scale, resulting in an oversupply of properties.

“It is good to open the market to foreign investors, but there must be parameters to control the developments,” he says, warning that the confidence level in the property market may be affected by the presumption of an oversupply when the properties are actually not targeted at local buyers.

Between 2013 and 2015, three prominent Chinese property developers — Country Garden Holdings Co Ltd, Greenland Group and Guangzhou R&F Properties Co Ltd, which has bought land from Iskandar Waterfront Holdings Sdn Bhd (IWH) — flooded the market with thousands of high-rise residential units on the waterfront in Johor Baru.

Late last year, Country Garden launched another mega development — Forest City — which will be built on a reclaimed island with a gross development value of RM441 billion.

IWH, which is in the midst of a merger exercise, is owned by tycoon Tan Sri Lim Kang Hoo (63.1%) and Kumpulan Prasarana Rakyat Johor (36.9%).

Some quarters believe that the Chinese developers’ projects are targeted at buyers from China, not Malaysians. Hence, the new units are not flooding the Malaysian market, so this does not warrant a concern.

Priority for the locals, please

To win more jobs, Chinese construction firms are teaming up with local companies. Recently, a joint venture (JV) between Kumpulan Jetson Bhd and China Communications Construction Co Ltd’s (CCCC) subsidiary, CCCC Third Highway Engineering Co Ltd, secured a RM202 million subcontract for the Sungai Besi-Ulu Kelang Elevated Expressway (SUKE) project. Last December, a JV between Econpile Holdings Bhd and CCCC’s local unit, China Communications Construction Co (M) Sdn Bhd, clinched a RM389.07 million subcontract for the same project.

That said, there are complaints that many mega infrastructure projects have been directly awarded to Chinese companies, for instance, the RM55 billion East Coast Rail Link, which has been awarded to CCCC. Also, a consortium of three Chinese firms — China Railway Construction Corp Ltd (CRCC), China Railway Engineering Corp and CCCC — is the main contractor for the RM8.9 billion Gemas-Johor Baru double-tracking project.

However, in earlier interviews with The Edge, CCCC and CRCC have indicated that they will spin off jobs to local players, which will likely happen in the second half of the year.

Being main contractors, the Chinese companies still need to farm out jobs to local subcontractors as it is very unlikely that they could do everything on their own.

Nonetheless, the local companies hold the view that priority should be given to them.

“If we deal with Chinese contractors (forming JVs), they may want a bigger stake in the implementation, which means that they will play a bigger role, bringing their own people and equipment. We (local contractors) are hungry for work. If we can do it, we want to do it, we don’t want to give the jobs to others,” WZ Satu Bhd executive chairman and CEO Tengku Datuk Seri Uzir Tengku Ubaidillah tells The Edge.

To him, the construction market is already tough, and with the competition from Chinese contractors, it is even tougher.

Uzir opines that the local players are losing out to Chinese contractors because most of the latter are able to tender for jobs without considering the need to make a profit as they are said to be backed by the Chinese government. “It is a different dynamic. They have excess capacity in their country and the machinery is lying idle there. So, the cost structure is different from ours.”

Although most Chinese contractors emphasise that they will award some of their jobs to their local counterparts, Uzir believes that most local players are unable to follow their pricing. For instance, the SUKE and Damansara-Shah Alam Highway projects, in which he sees the bidding prices going down.

“That’s bad because they are actually pricing it extremely low. Even if they give us a chance to compete, I think the local contractors will find it difficult to match their prices,” he says.

IJM Corp Bhd CEO and managing director Datuk Soam Heng Choon concurs. He says public projects should be reserved for local companies.

“I think the government should ring-fence the mega projects for the local players,” he says. However, he acknowledges that there are jobs that local contractors do not have the capacity to undertake, such as the construction of suspension bridges and super high-rise buildings.

“We hope the government can set the sizes of projects that they shouldn’t give to foreigners. Unless they are a very complicated projects in terms of engineering, they should be awarded to local contractors,” Soam says.

He adds that the Chinese contractors are more visible now partly because the Japanese have headed home due to the projects at home in preparation for the Tokyo Olympics in 2020. The South Koreans have also been quite subdued in the last couple of years.

Transformation for survival

However, not every local player sees the Chinese companies in a negative light; some believe the local companies can tap the experience of well-established Chinese firms.

“As businessmen, if it makes commercial sense for us to form alliances with Chinese companies, we will do it. The world is borderless. If we want to be so principled in certain things, forgetting the basic so-called common sense, then we may lose out,” MMC Corp Bhd managing director Datuk Seri Che Khalib said in an earlier interview.

Citing the group’s bridge project, which will connect the Port of Tanjung Pelepas and Tanjung Bin, as an example, he said MMC decided to partner a Chinese company as the latter had equipment in Malaysia and its construction cost was lower.

Econpile CEO Raymond Pang says local players need Chinese expertise in the construction of super high-rise buildings.

Pang, who has been working with Chinese companies in the past seven years, sees the piling company’s Chinese partners complementing it, rather than competing with it.

Foreign companies winning construction jobs that the locals can do is unacceptable to many. Certainly, this raises the question of whether the multiplier effect of multibillion-ringgit projects will actually benefit the domestic economy when contracts are awarded to foreigners, not to mention the hiring of foreign workers at the sites.

That said, some property developers find the local contractors not as competitive in terms of cost and productivity. Is it true? This question inevitably leads to another: Is it time for the local players to rethink and learn fast to climb up the value chain?

Datuk Seri Johari Abdul Ghani

Second Finance Minister

Foreign companies should use local content

As far as I know, there are no specific requirements or guidelines for foreign contractors to use local content at the moment.

However, MoF (Ministry of Finance) did issue a circular (Treasury Circular) to all ministries a few years ago to encourage contractors that undertake construction jobs for public projects to use “barang2 tempatan” as a priority.

I see no reason why we should not impose minimum local content on foreign contractors as there is a lot of future public infrastructure projects involving foreign contractors. This will minimise dependency on imported goods and reduce pressure on our country’s current account balance as well as currency.

However, we also need to take into consideration the availability of supplies before imposing such requirements on foreign contractors. This will ensure that the outcome of public projects is not compromised.

There is ample supply of products like concrete, cement, power cables, certain types of steel, floor tiles and roof tiles in our country. Ideally, we should only allow imports when the products are not available locally and cannot be substituted with local alternatives.

Encouragement to use local content should go beyond the materials used and include services rendered during the construction of public projects. Our country has an abundant supply of civil work contractors to undertake some of the packages of infrastructure projects and therefore foreign contractors should be compelled to use local contractors as much as they can. This will ensure continuous domestic capacity building related to infrastructure development.

Local contractors and building material suppliers should also prepare themselves to provide the services at competitive prices and the high standard of quality required by foreign contractors.

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