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ABSTRACT: The construction industry in China is developing toward the international procurement practice,
and such development has attracted many foreign firms into the Chinese construction market through the for-
mation of Sino-foreign joint ventures. Joint venture has become an important sector in the Chinese construction
industry. However, the difference in management systems, technological practice, and cultural background among
the partners within joint ventures brings difficulties to the function of joint venture. A significant degree of risk
is involved in joint venture investments. Thus, foreign firms increasingly intend to spend more effort in studying
proper strategies of managing risks in their joint venture businesses. Based on a survey, this paper establishes
a risk significance index to show the relative significance among the risks associated with the joint ventures in
the Chinese construction procurement practice. Real cases are examined to show the risk environment faced by
joint ventures. The paper also investigates practical applications of risk management in the business of joint
ventures.
1
The research team conducted a survey from August 1998 to
Assoc. Prof., Build. and Real Estate Dept., Hong Kong Polytechnic February 1999. The survey, distributed to 185 professionals,
Univ., Kowloon, Hong Kong.
2
Executive Dir., Henderson China Ltd., 5/F., Harcourt House, 39
received 54 effective replies from firms based in Hong Kong
Gloucester Rd., Hong Kong. or mainland China. The correspondents were from consultants,
3
Sr. Contracts Mgr., Henderson China Ltd., 5/F., Harcourt House, 39 designers, and project managers. They had good experience
Gloucester Rd., Hong Kong. working on behalf of a foreign partner in various joint ventures
Note. Discussion open until July 1, 2001. To extend the closing date in major cities in China including Beijing, Shanghai, Guang-
one month, a written request must be filed with the ASCE Manager of zhou, Chongqing, and Shenzhen. The majority of the respon-
Journals. The manuscript for this paper was submitted for review and
possible publication on April 13, 1998. This paper is part of the Journal
dents were working in leading construction and real estate
of Construction Engineering and Management, Vol. 127, No. 1, Janu- firms such as Henderson (China) Investment Co., Swire Prop-
ary/February, 2001. ASCE, ISSN 0733-9634/01/0001-00760081/ erties, New World Development (China) Ltd., Hongkong Land
$8.00 $.50 per page. Paper No. 18094. Ltd., China State Construction Engineering Co. (Hong Kong),
76 / JOURNAL OF CONSTRUCTION ENGINEERING AND MANAGEMENT / JANUARY/FEBRUARY 2001
Sun Hung Kai Properties Ltd., etc. Five in-depth interviews TABLE 1. Risks Associated with Sino-Foreign Construction
were conducted in December 1998 and February 1999 that Joint Ventures
supported the survey analysis. Rick classification Index
It is widely accepted that construction activity is particularly (alphabetical order) score
subject to more risks than other business activities because of (1) (2)
its complexity, and a wide range of risks associated with con- (1) Financial risk
struction businesses have been previously identified. A typical Bankruptcy of project partner 0.2595
classification of risks includes technical risks, management Difficult convertibility of RMB 0.3091
risks, market risks, legal risks, financial risks, and political Loss due to fluctuation of inflation rate 0.3236
risks (Shen 1997). He (1995) presented some examples of Loss due to fluctuation of interest rate 0.3650
risks involved in foreign investment in China. Based on pre- Loss due to fluctuation of RMB exchange rate 0.2500
Low credibility of shareholders and lenders 0.4555
vious works, a list of 58 risk factors, as shown in Table 1, (2) Legal risk
were constructed and presented to respondents. The main pur- Breach of contracts by other participants 0.2223
pose of the survey is not to develop a new list of risks but to Breach of contracts by project partner 0.2336
analyze the relative significance among the risks identified and Lack of enforcement of legal judgment 0.3345
to highlight the major risks. Loss due to insufficient law for joint ventures 0.3505
The respondents were requested to judge the significance or Uncertainty and unfairness of court justice 0.4319
(3) Management risk
expected loss of each risk. There are many criteria that re- Change of organization within local partner 0.1641
spondents may need to consider. One alternative approach Improper project feasibility study 0.6386
adopted by previous researchers is to consider two attributes Improper project planning and budgeting 0.4591
for each risk: the probability level of the risk occurrence, de- Improper selection of project location 0.5796
noted by ; and the degree of impact or the level of loss if Improper selection of project type 0.5523
the risk occurs, denoted by (He 1995; Li 1997). Therefore, Inadequate choice of project partner 0.5229
Inadequate project organization structure 0.3163
risk significance, denoted as RS, can be described as the func- Incompetence of project management team 0.4023
tion of the two attributes Incomplete contract terms with partner 0.4933
Increase in project management overheads 0.3341
RS = f (, ) (1) Poor relation and disputes with partner 0.1932
Poor relation with government departments 0.3935
By applying this approach, the respondents were asked to re- Problems associated with culture difference 0.1791
spond to the two attributes for each risk. For considering , Project delay 0.6364
the respondents were required to judge the probability level of (4) Market risk
risk occurrence by selecting one from among three levels, Competition from other similar projects 0.4614
namely, low possibility, normal possibility, and high possibil- Fall short of expected income from project use 0.2827
Increase of accessory facilities price 0.1500
ity. For considering , the respondents were required to judge Increase of labor costs 0.0391
the degree of impact if the risk concerned occurs, by selecting Increase of materials price 0.1786
one from among three grades, namely, small impact, neutral Increase of resettlement costs 0.5500
impact, and large impact. Inadequate forecast about market demand 0.5819
Local protectionism 0.4941
Unfairness in tendering 0.1708
ANALYSIS OF SURVEY RESULTS (5) Policy and political risk
To assess the relative significance among risks, this study Cost increase due to changes of policies 0.6409
Loss incurred due to corruption and bribery 0.4595
suggests to establish a risk significance index by calculating a Loss incurred due to political changes 0.2509
significance score for each risk. An alternative for calculating Loss due to bureaucracy for late approvals 0.5141
the significance score is to multiply the probability of occur- (6) Technical risk
rence by the degree of impact. Thus, the significance score for Accidents on site 0.1214
each risk assessed by each respondent can be obtained through Design changes 0.4978
the model Equipment failure 0.1141
Errors in design drawings 0.2518
S ij = ij ij (2) Hazards of environmental regulations 0.1563
Incompetence of transportation facilities 0.0377
i
where S = significance score assessed by respondent j for risk Increase in site overheads 0.2714
j
Industrial disputes 0.0722
i; ij = probability of occurrence of risk i, assessed by respon- Local firms incompetence and low credibility 0.4664
dent j; and ij = degree of impact of risk i, assessed by re- Materials shortage 0.0518
spondent j. Obsoleteness of building equipment 0.1305
By averaging scores from all 54 responses, it is possible to Poor quality of procured accessory facilities 0.2234
get an average significance score for each risk, and this av- Poor quality of procured materials 0.2459
erage score is called the risk index score and is used to rank Problems due to partners different practice 0.3205
Shortage in accessory facilities 0.1450
among all risks. The model for the calculation of risk index Shortage in skillful workers 0.1527
score can be written Shortage in supply of water, gas, and electricity 0.2450
54 Subcontractors low credibility 0.3909
Unknown site physical conditions 0.2345
S ji Unusual weather and force majeure 0.1145
i j=1
RS = (3)
54
where RSi = index score for risk i; and S ij = significance score neutral take a value of 0.5, and that high and large
assessed by respondent j for risk i. take a value of 1. By adopting these numerical scales, when
To calculate S ij, the three-point scales for and (low- the 54 responses are applied to model 2 and 3, the index scores
normal-high and small-neutral-large) need to be converted into for all risks are calculated, as shown in Table 1. Based on the
numerical scales. As an alternative method, it is suggested that index scores, risk ranking is established, as shown in Fig. 1.
low and small take a value of 0.1, that normal and The risk ranking provides a useful reference to help joint ven-
JOURNAL OF CONSTRUCTION ENGINEERING AND MANAGEMENT / JANUARY/FEBRUARY 2001 / 77
FIG. 1. Risk Ranking for Sino-Foreign Construction Joint Ventures in China
tures be aware of these major risks and plan proper ways of joint venture for damages. The contractor denied the liability
controlling them. and refused to attend any meeting for negotiation and settle-
ment. Finally, the case was settled through mediation, and the
RISK ANALYSIS joint venture had to reimburse the factory for all of the dam-
ages. Other adversities involved in this case include the dif-
While it is not practical to discuss the full implications of ficulty to control the contractors performance particularly on
all the risks identified in the survey, this section intends to the cost aspect during construction. The negotiation on rates
demonstrate the pattern of the risk environment by presenting for new items was almost always in favor of the contractor,
some practical examples discussed in the five in-depth inter- and the joint venture had to pay higher rates for many items.
views following the survey. Not all the risks addressed in this In the end, the project was delayed, and substantial extra costs
section respond to the most important risks ranked in the occurred. The experience learned from this case demonstrates
risk significance index as interviewees have different experi- one of many possibilities of making loss due to inadequate
ences, and their perception or judgment may not be fully in choice of partner. Usually, overseas businesses tend to find
harmony with the calculated average index scores. their partners from large state-owned companies. However,
many large state-owned companies may have huge registered
Management Risk capital and assets, but little real cash flow. Furthermore, they
often have a complicated and bureaucratic system, and their
The survey shows that there are five management-type risks top managers are usually appointed by the government. There-
among the 10 top risks. When the in-depth interview was con- fore, such a joint ventures cooperation needs to be incorpo-
ducted, it seemed that inadequate choice of project partner rated with the interests of the local partners superior.
is a typical risk to joint ventures. A wrongly selected partner
can lead to substantial losses. In a commercial building project Policy Risk
developed by a Sino-foreign joint venture in Shanghai, the
foreign partner suggested selecting the main contractor In the process of reforming the economy system, govern-
through selective tendering, but the local partner insisted on mental policies are subject to reviews or changes or updated
employing one of its subsidiary construction firms. Following as reform progresses. Therefore, many provisional policies and
a number of discussions within the joint venture, the local regulations are issued by both the central and local govern-
partners construction firm was eventually employed. How- ments. However, the variations in policies and regulations can
ever, due to the contractors inadequate building methods, dif- have significant impact on joint venture businesses. In the sur-
ferential settlement occurred at the foundation of the adjacent vey of this study, cost increase due to policy changes was
factory building, and its production line was damaged during ranked as the top important risk. A joint venture project located
the basement excavation of the project. The factory sued the in an old city in Guangdong province was to redevelop a res-
78 / JOURNAL OF CONSTRUCTION ENGINEERING AND MANAGEMENT / JANUARY/FEBRUARY 2001
idential area into a high-class residential area. More than 1,600 shortage of resources, injuries and accidents, etc. However, a
families used to live in the area. The joint venture started the typical technical risk associated with joint venture in China is
project by signing the contract in July 1993. One of the critical considered due to the partners different practices, although it
contractual terms concerned the resettlement of the residents. does not appear among the most significant risks in the survey
According to the existing policy, those residents affected by index. In a commercial building project developed by a joint
the redevelopment for commercial and high-class residential venture in Beijing, significant extra costs were incurred due to
buildings should be permanently resettled to an external lo- the difference in working procedures for constructing walls.
cation. The resettlement work started accordingly later that The incident concerned the procedures for laying conduits for
year. However, after less than half of the families had been electrical and mechanical installations, which was undertaken
resettled, the local government was requested by upper level by a nominated E&M subcontractor. The main contract in-
government to revise the resettlement policy. According to the cluded the term attendance for nominated subcontractors
new policy, if the demolition of old buildings was caused by works, which stipulated the main contractors responsibility
the redevelopment for residential buildings, those residents for attending to the works carried out by the nominated sub-
who were affected should be resettled into their original living contractor. However, during normal inspection, the joint ven-
district. The new policy was in effect and applicable to all tures work supervisor received a complaint from the E&M
projects irrespective of the date of contract signing. Due to the contractor that the local masonry workers hired by the main
sudden change of the policy, the joint venture had to change contractor were damaging the vertical conduits laid earlier by
the redevelopment plan, and the salable area from the devel- the E&M contractor. The supervisor went to the site and found
opment was dramatically reduced. As a result, it was reported that all vertical conduits were bent outward from structural
that the profit of this joint venture project dropped by over brick walls instead of being concealed in the walls as specified.
50%. When questioned, the workers setting the walls revealed that
Variation in tax composition is also a typical policy risk. the local practice of finishing the works was in the sequence
For the development of a construction project, there are many of erecting structural brick walls, making chases for conduits,
tax/fee items applied against urban infrastructure facilities, laying conduits by the E&M contractor, and applying finishing
public facilities, roads, water, gas, treatment for waste water, to conceal the conduits. When the masonry workers started to
police station, school, kindergarten, and public toilets. Ac- work, they found that vertical conduits were installed and ob-
cording to the central government policy, there are 48 tax/fee structed their operation. They therefore bent the conduits
items to be charged by 14 governmental departments on con- (some conduits were even pulled out and set aside) in order
struction project as follows: construction charging, 19; land to make way for setting the brick wall. When the supervisor
management, 10; electricity, 5; public security, 3; industrial discussed the case with the main contractor, the main contrac-
and commercial administration, 1; culture, 2; environmental tor blamed the E&M contractor and asked for compensation
protection, 1; labor resource, 1; auditing, 1; statistics, 1; civil for abortive works. Because the different practice was not ex-
administration, 1; education, 1; sports/physical culture, 1; and pected in the contract, the joint venture had to compensate the
post and telecommunications, 1 (SPC, 1997). However, this main contractor. This case demonstrates that different tech-
regulation has been violated in local applications. The number nological practices can bring considerable losses if coordina-
of tax/fee items varies widely in different regions. There were tion is lacking among the parties within joint ventures. In fact,
107 tax items for the development of a construction project in it is said that a significant part of contractual disputes within
Wuhan and 102 items in Beijing (Hung 1997). Most of these Sino-foreign joint ventures are due to poor communication and
extra items are charged against administration expenditures in misunderstanding between parties and that the difference in
local governments. Joint ventures may have to bear substantial technical practice is the major cause for the problem (Song
extra costs due to the variation in tax/fee items. 1999).
Technical Risk Market Risk
Any construction work will be subject to some technical The inadequate forecast of market demand was ranked
risks, such as changes and errors in design, equipment failure, as one of the major risks in the survey. One typical example