Heavy Chemical Industry to Embrace New Development Opportunities from BRI

Abstract

This chapter summarizes the business presence of Chinese heavy chemical companies in BRI countries and the necessity for China’s heavy chemical industry to go global. Then, we use a four-factor model of market, cost, governance, and support for the industry chain to analyze the investment potential of the industry in regions where BRI countries are located. Finally, we review three successful cases of Chinese heavy chemical firms going global, and list the challenges and measures to tackle the risks of investing in BRI countries.

We believe it is necessary for companies in the heavy chemical industry to participate in the development of the BRI and to expand their presence in BRI countries. In recent years, China’s heavy chemical firms have invested overseas through M&A and self-constructed factories, which has paid off. We believe investing in BRI countries can help China’s heavy chemical companies seize opportunities and guard against the risk of trade frictions. Meanwhile, Chinese investment may also promote local economic development, improve industrial competitiveness, and deliver mutual benefits.

The heavy chemical industry in BRI countries has large investment potential. Overall, the level of urbanization and industrialization in BRI countries is low, implying substantial growth potential for their heavy chemical industries. Based on an analysis of market, cost, governance, and industry chain support, we believe Southeast Asia and West and Central Asia are suitable investment destinations for China’s heavy chemical industry. Some African countries with sound governance also have investment potential, in our view.

We review the successes of the heavy chemical industry’s investment in BRI countries and summarize the key features of successful investments: (1) Advanced technologies and outstanding management capabilities; (2) strengthened localized operation and local employee training through different methods; and (3) the goal of mutually beneficial cooperation with governments and communities to pursue development.

When going global, the heavy chemical industry faces challenges from factors such as geopolitics, the regulatory environment, financing channels, cultural integration, as well as the construction and operation of factories. We believe governments and businesses can work together to address these challenges. This can be done by establishing a platform of information sharing among BRI countries, improving the investment insurance system, seeking to collaborate more closely with local companies or multinationals, encouraging companies in basic industries to take the lead, promoting the construction of large industrial parks, strengthening local employee training and localization, and enhancing the social responsibility awareness of companies that go global.

Author: QIU Xiaofeng, CHEN Yan, JIA Xiongwei, GONG Qing, XIA Siting, ZHANG Shuwei, LI Tangyi, HOU Yilin, YAO Xudong, LI Xiling.

10.1 Current BRI Investments by Chinese Heavy Chemical Firms

M&A is the primary way that Chinese chemical companies invest in BRI countries, and such activities are mostly led by SOEs. For example, ChemChina acquired Pirelli, the world’s fifth largest tire manufacturer, and Wanhua Chemical acquired BorsodChem, Europe’s fifth largest producer of methylene diphenyl diisocyanate. Chemical SOEs have tended to acquire foreign assets whose businesses are struggling, and whose shareholders intend to sell the assets. After the acquisition, the business operations of the acquired assets are likely to improve notably. In recent years, some Chinese private enterprises have acquired assets such as South Korean new material companies to obtain advanced technologies.

Amid a backdrop of international trade frictions and domestic environmental restrictions, a growing number of Chinese chemical companies are building production facilities in Southeast Asia and elsewhere with the aim of delivering cost advantages and market expansion. For example, tire companies are increasingly building factories overseas. Hengyi Petrochemical’s successful investment in an oil refinery in Brunei is a good example for Chinese companies seeking to build large refining projects in Southeast Asia.

Chemical companies take a prudent approach when going global, but BRI investments are likely to deliver satisfactory returns. When investing overseas, chemical companies take into account various factors such as local political stability, market potential, investment costs, and corporate management. Unlike building a factory in China, where conditions may be more accommodating, domestic chemical companies are more cautious about investing overseas. Their investment in BRI countries is thus limited at present, but the projects have tended to operate smoothly. Tire manufacturers, in particular, are seeing output and revenue growth at most of their factories overseas, and revenue and profit from Hengyi Petrochemical’s Brunei project and Wanhua Chemical’s subsidiary BorsodChem are improving (Fig. 10.1).

Fig. 10.1

Source Corporate filings, Wind, China Petroleum and Chemical Industry Federation (CPCIF), CICC Research

Chinese chemical companies’ investment in BRI countries. Note Data includes select projects as of 2022; financial data for ZC Rubber as of 1H22; the Chinese mainland operations of Linglong Tire booked losses in 2022 leading to its overseas net profit contribution exceeded 100%.

China’s steel industry is expanding its global presence. In recent years, companies in the industry have integrated into the industry chains of BRI countries and seized market opportunities. Initially, companies in the industry promoted the overseas expansion of key advanced equipment, products, and technologies. They have since developed iron ore resources and built steel production bases in resource-rich regions with access to infrastructure and in stable political environments. Multinational steel companies have been established through acquisitions, mergers, and alliances.

After the BRI was proposed in 2013, Chinese companies accelerated overseas expansion. Several cement production lines have been built overseas, utilizing different investment models. According to shuini.biz, as of end-2022, Chinese cement companies had built 44 production lines overseas, with total capacity of about 46.8 mnt of clinker, the equivalent of about 2.5% of domestic production capacity. Some of the leading companies involved include Anhui Conch Cement, Huaxin Cement, and Hongshi Group, while various privately owned SMEs have also built factories in Southeast Asia and Africa. Southeast Asia, Central Asia, and Africa have been the major destinations for overseas expansion, and a variety of models have been adopted, including M&A, self-construction, and joint ventures. According to corporate filings, the companies involved are developing steadily. For example, the gross margin of Conch Cement has stabilized after an early period of high growth in production and sales, and in recent years, Huaxin Cement’s overseas revenue has grown.

10.2 Background of the Heavy Chemical Industry’s Involvement in BRI Countries

Rising trade protectionism weakens China’s competitiveness in exports of heavy chemical goods. Since 2015, the US has imposed high anti-dumping and countervailing duties on China’s exports of passenger vehicle (PV) tires, cold-rolled steel sheets, hot-rolled steel plates, and high-carbon alloy steel rods, reducing the competitiveness of related exports. As the trend of trade protectionism develops, industry chains have become more concentrated in regional clusters. We believe that by investing overseas, the competitiveness of heavy chemical industry may improve.

Domestic energy consumption and carbon emissions policies limit the capacity expansion of some heavy chemical sectors. China’s efforts to achieve carbon neutrality constrain the construction of high energy-consuming consumer goods projects. According to the Action Plan for Carbon Dioxide Peaking Before 2030 released by the State Council in 2021, additional production capacity in oil refining and traditional coal-based chemicals industries will be strictly controlled in China, and targeted annual domestic capacity for primary refining of crude oil will be kept below 1 bn tonnes by 2025. In addition, the plan proposes a curb on inefficient development of energy-intensive and high-emissions projects. China has also emphasized a green transformation of heavy industry during the 14th Five-Year Plan (FYP) period (2021–2025), and there has been a marked reduction in the output of the steel industry. We believe China’s industrial policy guidance can effectively incentivize the heavy chemical industry to expand overseas in regions with abundant production factors, i.e., land and energy, as well as large environmental carrying capacity.

Chinese heavy chemical companies are exploring new growth drivers, and overseas expansion can provide more market opportunities. Driven by economic development and rising urbanization rates in some overseas countries, demand for the heavy chemical goods is increasing. Along with the transfer of labor-intensive industries to overseas regions, we expect Chinese companies to increase investment and expand their presence in overseas markets. For example, as infrastructure and real estate construction peaked in China, domestic demand for the cement industry began to decline. The major overseas destinations for domestic cement companies’ expansion, e.g., Southeast Asia, Central Asia, and Africa, are in the early or growth stages of infrastructure construction and urbanization, and they have relatively abundant mineral and land resources. In these markets, the development of the industry landscape is in the nascent stage, with ample room for market expansion, in our opinion.

Furthermore, investing in BRI countries may enable China’s heavy chemical industry to leverage its technological, management, and engineering capabilities to meet local demand for basic materials and improve the supporting infrastructure along the industry chains in BRI countries. This could help enhance the competitiveness of industry chains and promote local economic development and employment, in our view, thus achieving mutual benefits.

10.3 A Quantitative System to Evaluate Investment Destinations

The heavy chemical industry’s engagement in BRI investments can generate growth opportunities. However, generalizations are challenging due to the range of sectors in the heavy chemical industry and due to differences in resources and markets among BRI countries. Thus, we divide the heavy chemical industry into three subsectors, i.e., refining, cement, and steel, and evaluate the five major regions in which BRI countries are located, i.e., Southeast Asia, Central and Eastern Europe, Africa, West and Central Asia, and Central and South America, from the perspectives of market, cost, governance, and industry chain support.

In this section, we use a four-factor model (market, cost, governance, and industry chain support) to assign ratings to regions where BRI countries are located, and offer a blueprint for the future overseas expansion of China’s heavy chemical companies. The choice of factors is largely based on the insights we have derived from our surveys and interviews with companies. Security is often the top consideration for companies when selecting investment destinations, which is closely related to governance. In addition, the economics and feasibility of overseas projects are influenced by local markets, costs, and industry chain support. We anticipate that the findings will provide some guidance to China’s heavy chemical companies in selecting overseas destinations.

10.3.1 Market: Heavy Chemical Industries in Southeast Asia and Africa Have Large Growth Potential

We assign ratings to the five BRI regions by adopting the average rating of two aspects: Macro factors, including GDP and population, and the degree of self-sufficiency in sectors such as refining.

In Africa and Southeast Asia, GDP and population are growing rapidly, while per capita GDP and urbanization rates are lower than the global average. As growth in demand for heavy chemical products is highly correlated with economic growth, it is reasonable to use macroeconomic indicators such as CAGRs of GDP and population to represent the growth rate of overall market demand for heavy chemical products in various regions. Meanwhile, per capita GDP and urbanization rate are indicators of stage of regional economic development, and, to a certain extent, the growth potential of heavy chemical industries in different regions. In countries and regions that are in the middle or early stages of economic development, heavy chemical industries tend to have high capex. Judging from the overall stage of economic development and the growth in demand for heavy chemical products, we believe Southeast Asia and Africa are the top destinations for Chinese heavy chemical companies to go global (Fig. 10.2).

Fig. 10.2

Source World Bank, Wind, CICC Research

Economic growth and population of the regions where BRI countries are located. Note Due to limited sample size, not all BRI countries are included in the five regions above.

Southeast Asia and Africa lack oil refining capacity. We expect China to export refining capacity by leveraging mature technological design and engineering construction capabilities. Refined chemical products such as refined oil, ethylene, and p-Xylene (PX) are the basis for industrial development. However, most BRI countries lack a mature refining industry, adequate technology base, and sufficient capabilities to carry out R&D. China’s refining companies can provide full-process services covering technology licensing, process package design, and trial operation for large-scale projects.

Based on statistics released by BP in 2021, we calculated the oil refining capacity gap in each region and found that Africa and Southeast Asia had the largest gaps. By country, the refining capacity gap was large in countries such as Indonesia and South Africa. As we can see from the projects listed in Fig. 10.1, the refining projects build by Chinese firms are mainly in Africa, Southeast Asia, and Central Asia. As refining projects require a large amount of supporting infrastructure, facilities, and technologies, the export of refining industries is essentially the export of industrialization capabilities. We believe that China’s refining companies may continue to expand in overseas regions and countries with large supply–demand gaps and low levels of industrialization, but that are rich in resources and with favorable political environments (Fig. 10.3).

Fig. 10.3

Source BP, CICC Research

The oil refining capacity gap in 2021 in regions where BRI countries were located. Note We calculate the gap in refining capacity by subtracting oil consumption from oil refining capacity, and the greater the negative number, the larger the gap; BP’s data does not include all BRI countries, and data for each region is based on countries that disclose information.

Southeast Asia has the highest net import volume of steel products, implying large unfulfilled domestic demand and thus great growth potential for the local steel industry. According to data released by the World Steel Association in 2021, net imports of finished steel were 26.07 mnt for major Southeast Asian countries, 19.13 mnt for major Central and Eastern European countries, 10.65 mnt for major countries in Central and South America, 8.95 mnt for major African countries, and 2.35 mnt for major countries in West and Central Asia.

Southeast Asia and Africa are likely to be where China’s cement industry goes global. In our view, cement supply and demand are the decisive factors that determine the business climate of a cement market. A region cannot be considered a leading investment option if the supply landscape is largely fixed or is in oversupply, even when demand is strong. Likewise, if market demand is trending downward, it is unlikely that new market participants will enter the region. We believe regional markets with the following three features are suitable destinations for Chinese companies to expand their presence overseas. (1) A net gap in supply: Heavy reliance on imports of cement and clinker indicates a shortfall in domestic supply. To enhance self-sufficiency, it may be valuable to that country to attract capital to build capacity. (2) Strong market demand: Regional markets with booming demand are more attractive and offer higher visibility for investment. (3) Low level of market concentration and less advanced technology: In a regional cement market with low concentration, where industry development is inadequate and where less advanced technologies generally correspond to an overall flat and high cost curve, Chinese companies may gain competitive advantages due to their more advanced technologies and cost control linked to high operating efficiency. Based on this analysis, Southeast Asia and Africa are suitable destinations for overseas expansion, in our view.

Cement factories built in Africa are highly profitable. Judging from prices in the market and corporate filings from some firms, the Africa market is at a relatively immature stage with strong construction demand. The market lacks production lines that can ensure stable supply of high-quality cement. Chinese companies operating in Africa are highly profitable. For example, ex-factory price of West China Cement’s products from its production lines in the Democratic Republic of the Congo and Ethiopia reached US $150/t and Rmb748/t as of 2022,¹ both much higher than in China. Given the potential incompleteness of statistics on clinker imports and the overall ratings based on market factors, we believe that investment in capacity construction in Africa is promising (Fig. 10.4).

Fig. 10.4

Source World Steel Association, Pakistan Credit Rating Agency (PACRA), Statista, dcement.com, CICC Research

Net imports of steel and cement by region. Note The sample data on imports of cement clinker is small, and we use countries with high global imports as representatives.

Southeast Asia and Africa have high net imports of refined chemical products, steel, and cement, and we see large upside in their self-sufficiency ratios. The growth rates of GDP and population in Africa and Southeast Asia are relatively high, and their per capita GDP and urbanization rates are lower than the global average. Taking these macroeconomic indicators of each region and the net import volume of major heavy chemical products into consideration, we believe the heavy chemical industries in Southeast Asia and Africa have larger potential for growth compared with other regions.

10.3.2 Cost: Advantages in Investing in Heavy Chemical Industries in Southeast Asia and Africa

Cost is the main factor affecting competitiveness for heavy chemical products. When identifying investment destinations, cost should be an important consideration. In general, the major costs in producing heavy chemical products include raw materials, energy, depreciation, transportation, and labor. As crude oil and iron ore are priced globally, the difference in raw material costs mainly lies in other costs. In the following discussions, we mainly compare the remaining four types of costs in different regions.

Africa, Southeast Asia, and West and Central Asia enjoy an edge in refining costs. Cost is one of the core competitive factors in the refining industry. We estimate the refining costs for a 10 mnt/yr oil refining project in major BRI regions. Excluding the costs of raw materials, we found that Southeast Asia, Africa, and West and Central Asia have greater cost advantages, with processing costs at least Rmb100/t lower than in Central and Eastern Europe and Central and South America.

The steel industries in Southeast Asia and Africa also have advantages in costs. With high levels of product homogeneity, cost is an important competitive factor in the steel industry. Costs not only affect the operating results of steel mills, but also partially determine whether companies can operate in a healthy and sustainable way amid cyclical fluctuations. We estimate the steelmaking cost of a project with production capacity of 10 mnt/yr in major BRI regions. Most BRI countries would need to import the raw materials to build a steel mill, so the cost difference mainly lies in differences in transportation costs. Excluding raw material prices, we estimate that Southeast Asia and Africa have clear cost advantages, with processing costs about Rmb200/t lower than in West and Central Asia and Central and Eastern Europe.

Africa and West and Central Asia are competitive in terms of costs in the cement industry. Cost is one of the core factors in the cement industry as it directly affects the operating efficiency of production lines, with notable differences among individual projects. We estimate the cost per tonne of a 5000 t/day cement clinker production line (implying annual cement output of about 2 mnt) in major BRI regions. Energy consumption accounts for a dominant share of cement production costs, and as raw material costs of mines vary greatly given different locations and countries, we assume raw material prices are the same across regions. Based on our estimations, we believe Africa and West and Central Asia are relatively competitive in terms of costs (in fact, cement prices vary considerably among countries) (Fig. 10.5).

Fig. 10.5

Source McCloskey, dcement.com, World Steel Association, Hengyi Petrochemical corporate announcements, China Petroleum and Chemical Industry Federation (CPCIF), China National Chemical Information Center, CICC Research

Our rating of overseas destinations for expansion of the heavy chemical industry from the perspective of estimated costs. Note We use the costs of overseas factories in select countries and derive an average value according to our regional classification (latest available data up to June 2023); average costs may be affected by the sample size; the lower the total cost, the higher the rating (with 5 being the highest), and the greater the cost advantage the region enjoys.

10.3.3 Governance: Central and Eastern Europe, Southeast Asia, and Central and South America Are Better Suited to Investment for the Heavy Chemical Industry

Development of the heavy chemical industry requires heavy investment, hence marking the importance of sound governance. For example, Hengyi Petrochemical’s investment in its Phase I 8 mnt/yr oil refining project in Brunei was nearly US $3.45 bn, with high technical standards for continuous operation of facilities. It would be difficult to quickly recover the investment in the event of deprivation of ownership or use rights, geopolitical conflicts, etc. Using the 2020 Worldwide Governance Indicators (WGI) to evaluate the quality of governance for each BRI region, we found that Central and Eastern Europe, Southeast Asia, and Central and South America may be more suited to large investments.

10.3.4 Industry Chain Support: Central and Eastern Europe and West and Central Asia Have Solid Industry Foundation

The heavy chemical industry needs support in raw materials, infrastructure, and skilled workers, and each aspect has high requirements. The production capacity of a single factory operating with economies of scale will typically exceed 1 mnt/yr, which generates demand for raw materials, as well as transport for raw materials and products. Refining and other related industry processes tend to require high-temperature and high-pressure conditions, as well as supporting infrastructure and waste treatment facilities. In addition, the around-the-clock operation of large-scale facilities requires a substantial staff of experienced operators. Therefore, the needs for industry chain support mainly consist of raw materials, infrastructure, and skilled workers.

For raw materials, crude oil and iron ore are the main raw materials in the refining and steel industries. We calculate the proportion of crude oil reserves and iron ore output in the representative countries of the five regions relative to the global total, to represent the level of raw materials in the refining and steel industries. We assign a rating of one to five for the five regions. Our analysis excludes limestone, which is common, and so is not considered.

For infrastructure, construction in the heavy chemical industry is inseparable from infrastructure such as environmental treatment and heating. We use World Economic Forum (WEF) scores released in 2019 to assess the level of infrastructure support for each region, and assign ratings of one to five for each of the five regions.²

For skilled workers and engineers, the heavy chemical industry has complex production processes and high technological barriers to entry, which requires large numbers of skilled workers and engineers. Based on the global secondary school enrollment data released by the World Bank in 2018, we select the four most populous countries in each region and calculate the average enrollment rate. We then rate the five regions from one to five based on the average enrollment rate. We are upbeat on the potential of Central and Eastern Europe and Southeast Asia to educate engineers on a large scale.

We derive an overall rating for supply chain support for each region by taking the average of the three ratings. Although support for the refining, cement, and steel industries varies among regions, we believe that West and Central Asia, Central and Eastern Europe, and Central and South America are good destinations for investment in the heavy chemical industry given their solid foundation for industry chains (Fig. 10.6).

Fig. 10.6

Ratings of support for industry chains of heavy chemical industry in overseas investment destinations. Note Limestone resources are common and are not considered in our analysis; only infrastructure, skilled workers, and engineers are considered in our ratings of cement industry chain support; data as of 2021 except for infrastructure, which is based on 2019 data; the higher the rating (with 5 being the highest), the better the industry chain support the region has. Source Wind, The Global Competitiveness Report 2019 by the World Economic Forum, BP, CICC Research

10.3.5 Overall, Southeast Asia, West and Central Asia, and Some African Countries Are Attractive Investment Destinations for the Heavy Chemical Industry

We rank the five regions on the weightings of the four characteristics of market, cost, governance, and industry chain support. We believe Southeast Asia, and West and Central Asia are attractive investment destinations for the heavy chemical sectors. Some African countries with sound governance are also good choices for investments, in our view. In addition, Central and Eastern Europe are appealing destinations for the steel and petrochemical sectors.

Figure 10.7 compares the overall investment landscape in the five regions. It should be noted that there are large differences in cost and governance between countries in the same region. Therefore, due diligence and communication with government officials is necessary when identifying specific investment destinations—especially in Africa, where the governance scores of countries vary greatly. For example, Morocco has relatively high governance scores, while other African countries tend to score lower. We believe other select African countries with high governance scores may also become attractive investment destinations for the heavy chemical industry.

Fig. 10.7

Source CICC Research

Quantitative evaluation of overseas investment destinations in the BRI for the heavy chemical industry. Note Ratings are subject to sample selection and calculation method; the formula for weighted average rating without considering governance = 50% * market + 30% * cost + 20% * industry chain support; the formula for weighted average rating including governance = 40% * market + 20% * cost + 20% * governance + 20% * industry chain support.

10.4 Successful Cases of Going Global

According to our rating of governance, market, cost, and industry chain support, Southeast Asia and West and Central Asia are the most attractive investment destinations for the heavy chemical industry. However, companies may encounter practical problems in the process of expanding in these regions. In this section, we summarize the commonality of three successful cases of Chinese heavy chemical firms going global, namely Hengyi Petrochemical’s Brunei project, the HBIS Group acquisition of the Smederevo Steel Plant in Serbia, and Huaxin Cement’s overseas expansion. These heavy chemical companies have generated good returns from their successful investments and operations in BRI countries, which we attribute to three factors.

The first factor is advanced technologies and outstanding management capabilities. To go global, Chinese companies in the heavy chemical industry have established multiple advantages in technology R&D, engineering construction, and team management. In terms of technological capabilities, taking the petrochemical sector as an example, core output of facilities produced in China (e.g., 10 mt/yr oil refining and 1 mt/yr ethylene facilities) have largely reached the level of comparable plants elsewhere around the world. In terms of engineering capabilities, Chinese engineering construction and engineering technical services in the chemical, cement, and steel industries are considered advanced and compete at a global level, in our view. For example, China Huanqiu Contracting and Engineering (chemical industry) and Sinoma International Engineering (cement sector) have become world-leading heavy chemical engineering, procurement, and construction (EPC) companies. In terms of management capabilities, the number of people working in China’s chemical, cement, and steel industries exceeded 10 mn in 2021, implying a large talent pool from which to export managerial knowledge to other countries. In addition, we believe Chinese management teams have rich experience in localized operations and in respecting local culture and customs.

The second factor is localized operation. The three expansion projects we have mentioned all involve investment of substantial amounts of time and resources to hire and train local employees. For example, HBIS Group established a platform for employee training and exchange between China and Serbia, with Serbian employees assuming key leadership positions. In another example, Huaxin Cement has implemented a system that sees a senior Chinese employee instruct a local employee on the job.

The third factor is mutually beneficial cooperation. Brunei has abundant oil resources but lacks refining capacity. Hengyi Petrochemical’s investment was in line with the government’s need to expand refining capacity. The Smederevo steel mill in Serbia was loss-making for many years and on the verge of bankruptcy before being acquired by HBIS Group. It became profitable six months after the acquisition, ensuring the employment of more than 5000 Serbians, which promoted social stability and economic development for the country. We believe mutually beneficial cooperation between heavy chemical companies, local governments, and communities is critical to the success of these projects, and that common interests can facilitate greater development.

10.5 Reflections and Insights

10.5.1 Challenges Faced by Chinese Heavy Chemical Companies in Expanding Overseas

• (1) Unstable political environment. The international security landscape has evolved rapidly in recent years, and geopolitical events such as US-China trade frictions, Brexit, and the Russia-Ukraine conflict have altered the course of globalization. Instability in the global political environment may make it more difficult to achieve mutually beneficial results for overseas projects.

• (2) Varying legal systems in BRI countries. The legal systems of BRI countries differ from China’s legal system, as do the rules protecting the assets of foreign investors.

• (3) Limited access to financing channels and forex fluctuations. Institutions that offer financial support in BRI countries are often characterized by high thresholds for granting loans, stringent credit requirements, and strict project reviews. In addition, the earnings of companies that go global are more susceptible to exchange rates fluctuations.

• (4) Cultural differences. China and BRI countries have different cultures, which may lead to greater obstacles to investment and operation, economic risk, and higher costs of coordination and governance for companies.

• (5) Long project cycles. Investment destinations are often in regions with abundant oil and gas resources but poor infrastructure, such as West Asia, Central Asia, and Africa. A lack of industrial infrastructure in such regions means refining and petrochemical projects with Chinese backing generally involve large investments and long construction periods.

• (6) Inadequate international operations and management capabilities. Chinese companies that go global need managers and key employees to be deployed abroad and to lead local employees. Difficulties in recruiting core staff and in managing staff are significant issues for the heavy chemical industry when considering an investment in BRI countries.

• (7) Different engineering standards. When building factories overseas, companies in the heavy chemical industry often face additional costs due to engineering standards that vary between countries.

• (8) Lack of supporting infrastructure along industry chains. Raw material transportation and equipment utilization in the heavy chemical industry necessitate related infrastructure and energy support. If infrastructure is not available, other Chinese companies may also need to go global to help build infrastructure, raising costs.

10.5.2 Possible Solutions to Mitigate Risk and Overcome Challenges

• (1) Establish a platform to share information among BRI countries, and conduct due diligence on local policies and the investment environment. For example, the Japan External Trade Organization was founded to provide Japanese companies with the most up-to-date overseas information and due diligence reports to help them expand overseas and reduce risks.

• (2) Improve the investment insurance system. The investment insurance system could be optimized to encourage and protect the investments of Chinese companies in BRI countries.

• (3) Seek collaboration with local companies or multinationals to share benefits and risks. Domestic companies may establish joint ventures with local firms or multinational companies operating in the local market. This can help domestic companies reduce their investment and risks, as well as make better use of the advantages from operating in the host country, which is conducive to Chinese firms’ quick and effective integration into the local market.

• (4) Encourage companies in basic industries to take the lead, guide companies to expand their presence in downstream sectors, and promote the construction of large industrial parks. We believe that domestic companies in basic industries (e.g., energy sectors such as coal, oil, and electricity, as well as metallurgy, basic chemicals, and transportation) can be encouraged to take the lead in expanding overseas in countries with poor infrastructure or that require basic industry development, laying a foundation for the development of downstream sectors along the industry chain. In countries that have started to develop a basic industrial footprint, Chinese enterprises can be guided to build supporting facilities in the downstream of the industry chain.

• (5) Strengthen local employee training and localization. Experience shows that cultivating local employees can effectively reduce the impact of cultural differences, enhance corporate identity in host countries, reduce costs, and reduce staff turnover.

• (6) Strengthen awareness of social responsibility. Compared with large Western multinational firms, Chinese companies are less experienced in going global. It is thus necessary for Chinese companies to monitor their environmental, social, and corporate governance (ESG) performance to establish a strong foothold and grow steadily in overseas markets.

• (7) Enhance communication and promote the adoption of Chinese standards for new projects. If new projects adopt Chinese standards, the threshold and cost of technology exports can be greatly reduced, and the construction cycle will tend to shorten notably.

• (8) Improve international management capabilities of enterprises. This can be achieved in three main ways. First, learn from the experience of multinational companies. For example, Huaxin Cement has introduced a management model with foreign major shareholders, producing good results in terms of employee and customer loyalty, governance structure, and efficiency in decision making. Second, attract high-caliber employees with international management experience. Some top-tier domestic technology and engineering companies have accumulated experience in international operation and management, and staff can be introduced to companies seeking to expand overseas. Finally, strengthening the training of international employees can also be an aim.