Mexican Lessons For China After High-Speed Rail Deal Collapses
BEIJING — The Mexican government announced Nov. 4 that it had awarded its first high-speed rail contract to a Chinese-led consortium. But as the exciting news was still buzzing in the Chinese press, Mexican President Enrique Pena Nieto suddenly canceled the deal five days later.
As the media later reported, the consortium led by China Railway Construction Corp. was the only bidder, and it includes a Mexican firm said to be very close to President Nieto. Opposition parties vigorously questioned the legality and transparence of the bidding process, saying they suspected corruption.
Meanwhile, shocked by the Mexican government's capricious behavior, many in China are outraged by Mexico's backtracking. The Mexican government has actively taken the initiative to grant the consortium a compensation fee equivalent to 1% of the original construction deal. But it will probably never be known whether the payment stems from legal considerations or from political blame.
In any case, it's true that certain parts of the original deal are truly puzzling.
Consider first the bidding deadline. To win the bid, China Railway Construction Corp. formed a team of 400 people to work night and day for two months. The deadline was so extreme that some of the time they slept in the office. Meanwhile, 16 potential rivals — including Japan's Mitsubishi, France's Alstom, Canada's Bombardier and Germany's Siemens — all abandoned the bidding because of the tight timing.
So how was it possible for the Chinese consortium to develop its bid for such a huge project in just two months? Evaluation of the project's feasibility and the environmental impact study couldn't have been conducted properly in such haste. China Railway Construction Corp. is another example of a Chinese company that ultimately pays for its greedy and hasty overseas contracts.
Moreover, the Mexican government said that it put the work out to bid last November, which contradicts the consortium's claim that it has been working on the project since last September. Does this incongruity hint, as Mexico's opposition parties claim, that the Chinese-led consortium does have improper relations with President Nieto? It's very common for Chinese companies to use personal connections, because they are convinced that projects can't succeed without bribing people. Though there is historical cause for this psychology, it is outdated in today's business climate.
Fall in line, China
China has been cracking down vigorously on corruption in recent years, and there has been parallel anti-corruption momentum in international business circles. Several anti-corruption conventions and practices were promulgated by the UN, the International Chamber of Commerce, the OECD and the G20, and these have been consistently strengthened by member countries. Chinese companies would do well to conform to this trend and enforce enterprise compliance management.
Also curious in this case is the rail project's estimated construction cost. According to the consortium's announcement, the contract project amounts to $4.4 billion, with operations and maintenance accounting for $660 million. Suppose the Chinese company wouldn't have pocketed a penny and invested the total of $3.74 billion into building the 210-kilometer high-speed rail system. That would mean a per-kilometer cost of $18 million. That is roughly half of the building cost in China, where rail costs $33 million per kilometer.
The consortium explained this difference by saying domestic rail costs $33 million per kilometer because it is built to run at a speed of 350 kilometers per hour. The Mexican rail project was planned to run at just 300 kilometers per hour, somehow making the cost lower.
It's common practice for Chinese companies who want to expand overseas to bid low just to win a contract first, then to carry out price increases through contractual adjustments. In Africa or Southeast Asia, where legal awareness is low and press freedoms are minimal, this may work. But in the West or even in Russia, Brazil and Mexico, this is a risky strategy.
China Railway Construction’s light rail project in Mecca, Saudi Arabia, three years ago illustrated this well. I have personally encountered quite a few of clients who fell into this kind of trap, and they regretted it bitterly.
When Chinese companies encounter a setback, they tend to resort to the government's help. They try to fall back on the two countries' political relationship, but many companies still end up paying a huge cost for this misjudgment.
In the end, it is perhaps not such a bad thing that Mexico revoked the rail contract. It will give China's companies something to think about.