Tool for Breakthrough?
The Chinese government is showing a move to acquire and use Daewoo Engineering & Construction Co. for the One Belt, One Road project, an ambitious attempt to recreate some of the economic networks that once bridged Europe and Asia through the Silk Road. It has put an investment company under the State Administration of Foreign Exchange (SAFE) to the bidding battle for Daewoo E&C. It seems that Chinese construction firms are seeking to undertake the One Belt, One Road project in the African region where they are struggling, under the name of Daewoo E&C.
According to investment banking (IB) industry sources on December 25, Elion Holdings, which participated in the competition to acquire Daewoo E&C, is a subsidiary wholly owned by China’s state-run investment firm CNIC Corp. established in 2012. China’s SAFE has a 90 percent stake in CNIC Corp. through its two subsidiaries. Elion Holdings is practically an investment company of China’s SAFE that manages sovereign wealth funds.
Elion Holdings joined in a preliminary bid but the company failed to be shortlisted for the sale of Daewoo E&C because it was an unknown company. However, it attended the briefing session on the 18th and had a question and answer session about Daewoo E&C management as it joined hands with the China State Construction Engineering Corp (CSCEC), the largest construction company in China. An official from the industry said, “CSCEC took part in as a strategic investor (SI), while Elion Holdings did as a financial investor (FI). Since China has a different view on a corporate value from South Korea, it can offer the price higher than expected under some circumstances.” With some market watchers saying there are no buyers who can afford Daewoo E&C worth at least 2 trillion won (US$1.85 billion), Chinese investment firm Elion Holdings has turned the tide after it participated in as a FI. An expert in China’s investment said, “We should carefully pay attention to the participation of Elion Holdings, which drives investments of the SAFE. It means that the Chinese government is helping CSCEC acquire Daewoo E&C.”
Elion Holdings is not well known in South Korea but its CEO Chen Quosing was introduced as an expert on real estate development in China at the Korea-China Economic Cooperation Forum held by the Saemangeum Development and Investment Agency in 2014. At that time, Chinese figures recommended it to him through the Korea financial Investment Association and Chen showed an interest in the development of Saemangeum but it didn’t lead to the investment.
Elion Holdings is investing in resource development, mainly in Latin America. In particular, the company achieved good results after it took part in as an FI of China’s state-run companies going global. In 2014, Elion Holdings made a profit of 22.5 percent after it participated in as a FI when China’s state-run mining firm CITIC Metal formed a consortium with Australia’s Minerals and Metals Group and made a 10 trillion won (US$9.28 billion) investment in Las Bambas mine in Peru. The Las Bambas mine has started mining copper from 2015 and produced more than 250,000 tons in 2016. China’s One Belt, One Road project includes a strategy to secure excellent mineral resources by building infrastructure in underdeveloped countries.
The One Belt, One Road project is China’s grand foreign economic plan that encompasses not only infrastructure but also commerce, industrial and regional development from Asia, including Russia, to India, Africa and Europe. After President Xi Jinping officially announced the initiative in Kazakhstan in 2013, China has been establishing various infrastructure construction investment organizations and holding economic cooperation forums in numerous countries up to date.
The One Belt, One Road project is trying to use Daewoo E&C in order to enter the construction market in Africa and Southeast Asia. These countries, which were former colonies, have been against western support so they accepted China’s investment proposal which was almost an economic aid. However, China has been shunned by the Southeast Asian and African markets as Chinese construction companies hired Chinese workers in the construction sites and refused to transfer technologies, despite what it promised. Notably, the markets rejected proposals from Chinese constructors or investors after some of construction works were found to be faulty. Construction of the Jakarta-Bandung high-speed railway in Indonesia has been delayed due to complicated expropriation problems in the country and the Diamer-Basha dam project was canceled because of strong opposition from the people in the country. In addition, high-speed construction projects in Thailand, Venezuela and Libya have been suspended.
As the situation for construction projects overseas has worsened, the Chinese government is drooling over Daewoo E&C. Since Daewoo E&C has paved the way for the markets in Middle East, Africa and Southeast Asia from 1977, the company is winning orders from Algeria, Vietnam, India and Kazakhstan. Daewoo E&C also has a higher brand value in other countries than in South Korea. However, Daewoo E&C also made a loss in some Middle Eastern countries, such as Iraq and Algeria, owing to lower oil prices and political unrest and civil wars and saw some orders have been canceled. Some market experts say that Hoban Construction, another company shortlisted, will split its business at home and abroad and sell them separately as the company is a relatively strong player in the domestic housing market. In this regard, an official from the Korea Development Bank, the largest shareholder of Daewoo E&C, said, “We are not considering the hive-off at all.”