Economic Analytical Unit - Department of Foreign Affairs and Trade

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China Embraces the World Market

Address by Ed Vowles

29th November, 2002
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Cardno MBK's China Experience

Good Morning Ladies & Gentlemen,

I am very pleased to be part of the EAU's report "China Embraces the World Market" launch today.

Let me take this opportunity to briefly tell you about Cardno MBK and our experience in China.

Cardno MBK are Consulting Engineers providing design and management services for a broad range of civil engineering infrastructure projects covering urban development, roads and bridges, water supply and wastewater treatment, water resources and environmental management, marina and wharf development, and building structures.

We have been exporting consulting services since 1963 (opened office in Papua New Guinea) and today our international operations returns between 25 30 percent of our fee revenue.

Cardno first started marketing consulting services to China in 1990 under the World Bank Loan Programmes directed to the development of the Highway Network in China. It was at the time when China was just opening to the Western World, and competition for involvement in the World Bank Programme was intense. Whilst we incurred considerable costs pursuing and bidding for several major transport infrastructure projects, Cardno was not successful except for a small Institutional Strengthening Project (1990) for which we were commissioned by the World Bank. This project, and hence the Company's momentum in China was stalled, after the World Bank cancelled their programme in China after the Tianamen Square Riots. At this time the Company's Board of Directors deemed that no more funds would be spent on the China market.

Reasons for failure:-

The continued emergence of China on the international market, along with the growth of Cardno MBK has made us rethink our position in regard to China. The Company's strategy for growth determined that the International market offered the greatest potential for such growth, and China, along with India presented itself as the largest market with major demands for infrastructure development "A market within our Region too large to ignore".

A revised strategy to enter the Chinese market was developed and approved by the Board in March 1999.

This strategy was developed around a few key factors as follows:

Achieving success in China will require all of the above in varying degrees of importance, with the 3 most critical factors being "RELATIONSHIP, RELATIONSHIP & RELATIONSHIP". Trust is also a very important component of relationship.

Another critical element in achieving success in China is the establishment of a track record (to combine with a track record of key staff). The Chinese believe, and they are probably correct, that working in China is different than working elsewhere; they are reluctant to engage Consultants who cannot demonstrate a track record of working in China, with Chinese Authorities or Organisations.

This gets back to the emphasis on "RELATIONSHIPS". Cardno has found that well established relationships have lead us into receiving some small non competitive commissions to help us establish this necessary track record. Relationships can often be a very personal thing, based around an individual. The higher that individual is in the management structure of the Company, the stronger the relationship will be. To the Chinese, status and hierarchy are very important, and this should be remembered when sending staff to China on Business Development, or when receiving Chinese visitors in your offices.

Be prepared to accept such small commissions for the purpose of establishing a track record, and not for financial gain. Payment for such commissions are likely to be based on covering costs, but not profit contributions and you will need to be prepared to accept payments in local currency.

Projects carried out under such arrangements are likely to include:

A few things that Cardno MBK has learnt over the past four years since re-establishing a focus to China, which could be useful to note are:

1. Business decisions are not made in the office, they are made or consummated over dinner or similar social functions.

2. Authority is not readily delegated decisions are made at the highest level.

3. The Chinese are well educated, have excellent skills and like to make you aware of this.

4. They are seeking value added, or new technical, solutions.

5. Authorities or State Owned Enterprises are very keen to establish MOU's/Joint Ventures with Overseas Organisations.

6. Things take time in China, so be flexible when planning trips/programmes.

7. Whilst perhaps not as blatant as in some Asian Countries, deals are "done", so it is wise to have somebody looking after your interests.

A sample of the Projects Cardno MBK have been involved with or invited to bid in China include:

The EAU publication addresses China's entry to WTO and the challenges raised by this. How will this effect Australian companies looking to sell services to China is difficult to ascertain.

Whilst I believe it will not change how Cardno MBK will go about doing business in China, it is likely that competition will increase as China emerges to the world. To offset competition, we see opportunities increasing as the private sector takes over some of the Governments role in delivery of infrastructure, and the middle class population expands.

WTO entry will also improve current payment problems which Cardno MBK are experiencing. We have been contracted for many of our small commissions for payment in RMB, which we have not been able to transfer out of China. Whilst we have been able to offset such payments against local operating expenses, as larger projects are initiated we need payment in US dollars or the ability to convert local currency. WTO entry will provide this.

Finally, I would like to applaud the initiatives of the Department of Foreign Affairs and Trade's Economic Analytical Unit, for preparing the publication "China Embraces the World Market", which serves as an excellent guide to doing business in China, and the Queensland Department of State Development for the excellent support they give to Queensland Companies pursuing business in China.

Thank you for the opportunity to share the goals and experiences of Cardno MBK working in China, with you.

We see the China market as being very important for the future growth of the Company, and welcome the opportunity to work with other Queensland Companies in doing business in China.

Ed Vowles

27 November, 2002

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