The Fletcher School

Daniel K.H. Chao (F ’75), Bechtel Group, Inc.

Business opportunities in China are plentiful these days, and no one knows that better than Daniel K.H. Chao, F’75. Chao, who holds a MALD and a Ph.D. from Fletcher, is a Senior Vice President of Bechtel Group, Inc., the engineering and construction giant. He is responsible for all of Bechtel’s activities in China and its environs. Chao discussed Bechtel and the theory and practice of doing business in China with Fletcher students and faculty on October 14, 2004 as part of the International Business Program’s Global Speaker Series.

“Bechtel builds big, complicated infrastructure projects,” Chao told a crowded Isobe conference room. “That’s our value proposition.” Given China’s geographical size, enormous population, and movement toward a market economy, the opportunity for private foreign companies to build big, complicated facilities is seemingly endless. There are 1.3 billion people living in China, but the nation’s infrastructure is underdeveloped. Bechtel has taken advantage of the tremendous potential for business in Chinese infrastructure projects, and has built over 100 projects in China, including the construction of three nuclear power plants and a Motorola microchip factory. It is currently project manager for a $4 billion petrochemical complex being constructed for Shell and the China National offshore Oil Corp (CNOOC), and hopes to participate in China’s plans to build more nuclear power plants and high-speed rail lines.

China is the fastest growing consumer market in the world, and by 2025, China’s economy will account for 25 percent of the total world economy, according to World Bank figures. China consumes large portions of the world’s raw materials, including 25 percent of the world’s steel and 30 percent of its cement. Indeed, one-fifth of the world’s heavy cranes are being used on building projects in Shanghai alone. Foreign contractors are able to succeed in China due in no small part to lower labor costs. “To be low cost, you have to be local,” Chao said. Bechtel does not directly hire construction workers for their projects in China, but rather they subcontract out the construction jobs to Chinese companies. “You can’t beat their costs,” Chao said.

Despite China’s business potential, it is difficult for companies to succeed financially due to the intense competition. However, Bechtel is successful and Chao says that “Yes, we do make money in China.”. For a company with the resources and expertise of Bechtel, it is not as financially rewarding for it to take on relatively small-scale, uncomplicated projects like the construction of industrial facilities. It is the big projects, like the petrochemical facilities and power plants, that are the larger cash generators for Bechtel. However, in order to build and sustain its local company, Bechtel also needs to win and build smaller facilities. Bechtel’s overarching strategy in China combines the elements of partnering, procurement, engineering, people, and experience to achieve its goal of enhanced cost competitiveness and broader capabilities. Bechtel’s ability to satisfy customers and motivate and retain employees generates business for the company worldwide.

Bechtel has been successful by every measure over its 106-year history. The privately owned company is still in the Bechtel family, and Riley Bechtel, the great-grandson of the founder, is currently chairman and CEO. Bechtel employs 40,000 people in 60 countries, and has benefited greatly from its joint ventures with local companies. Chao is responsible for overseeing Bechtel’s partnerships with CITIC (a major, diversified Chinese state owned enterprise), and Sinotech, a Taiwan government entity. Bechtel’s value to clients is in its abilitiy to perform according to the specifications,, of high quality, according to the budet, and on schedule. As Chao said, “If time is not a factor, they can do [the project] themselves.” The issue of sticking to a strict timetable is especially important to foreign investors, who value the ability to complete a project quickly and efficiently.

Of course, not every project is a gold mine in China, and there are significant obstacles to success. One of the biggest obstacles is working throughthe Chinese government itself, which is large and complex. The Chinese government is changing its laws constantly to meet WTO requirements and there are also different requirements between the central and municipal government. In this regard, Chao outlined the advantages and disadvantages of doing business in China. The fact that China is moving toward a market economy and liberalizing the labor market are pluses for Bechtel. The market is still imperfect, which provides many opportunities for Bechtel. On the other hand, the enormous population, the ever-changing laws and regulations, the intense competition, and cultural differences, all pose obstacles that Bechtel must overcome to succeed in China.

Chao’s work is intriguing to many Fletcher students, evidenced by the sizable turnout at his presentation. But he made no illusions about the difficulty of succeeding in the industry. Because labor costs are so low in China, Bechtel does not hire many ex-pats since they are so much more expensive than local employees. More and more locals have the training to do the jobs that previously only foreigners could do, and even locals who have gone overseas to get advanced degrees are now getting priced out of the market because even they are becoming too expensive. “Everything has to be cost-effective,” Chao said. “People will do what is necessary to survive.”

Article by Evan Pressman, MALD '05