China Railway Construction Corporation was founded in 1948, in 2007 a limited company was incorporated by the name of China Railway Construction Corporation Limited (CRCC) and it is listed in Shanghai and Hong Kong stock exchanges. It is multi-billion dollar global Construction Company which is administratively owned by state-owned Assets Supervision and Administration Commission of the State Council of China (SASAC); CRCC is the one of the largest and influential integrated construction group, which has dedicated departments for construction supervision, design consultation, real estate development including scientific research (China Railway Construction Corporation limited, 2020). The range of services it offers distinguishes it from other construction entities. Porter’s five forces model is a helpful tool to identify opportunities and threats faced by CRCC.
Competitive Rivalry in the Market
The construction industry is competitive by nature, There are always many entities and individuals offering construction and engineering services. CRCC holds a slight advantage in construction companies due to its size and global presence. It is currently ranked 59th among the Fortune 500 companies, with 356,326 number of employees and annual revenue of $110,455 (Fortune, 2020). CRCC has its fair share of competitors its major competitors are China State Construction International Holdings Ltd. with annual revenue of $7,097.41 million and net income of $574 million (Nikkei Asian Review, 2020) and China Railway Group Ltd. with the annual revenue of $111,890.83 million and net income of $2,479 million (Nikkei Asian Review, 2020). CRCC also faces competition from international competitors; to conclude, the construction industry is highly competitive.
Threat of Substitutes
Services that are on offer by the construction industry are hard to replicate, the Construction industry has existed for centuries and it has gradually evolved throughout, but there is no real alternative available for services offered. There have been many perceived alternatives from pre-fabricated slabs, 3d printed model houses to RV vehicles cabin cum apartment but they all prove to be short-term substitutes rather than a true alternative to old school construction. The monotonous tasks can be automated by the use of available technology, like robots can be used to partially replace human labor, but tasks that require dexterity will still be performed by human labor (Saidi et al, 2008). There is potential for improvement, but currently, there is a low threat of substitutes for the construction industry.
The Threat of New Entrants
The Construction industry is capital intensive, huge initial capital investment is required for the companies to operate and sustain large operations. Heavy machinery is required for large scale projects. There is a need for strict adherence to Licensing and compliance requirements to operate in the construction industry. Large construction entities have a global presence and can compete globally for business; they have the war chest in terms of capabilities to move across the globe for large scale infrastructure projects. Small construction organizations do not compete with the market giants, they get their business from them in form sub-let construction contracts or by supplying Human Resources on a project to project basis. These firms have operations locally and they make their earnings by taking a small piece of pie from larger companies. Threats of new entrants are low as the industry is highly regulated and there is high capital investment required.
Bargaining Power of Buyers
In the Construction industry business is usually won through the bidding process. Tender is floated in the market and interested firms bid for the project with their proposal. Buyers are usually governments, high net worth individuals or syndicate of high net worth individuals. Proposals are evaluated through strict due diligence process, they are evaluated on many factors including the technical ability of the firm, quoted financial cost, previous experience of the firm, market recognition and ethics. Other than that projects are offered because of good networking or personal relations. Firms need to have technical capabilities, strong profile, market presence and ethical track record to get business. Buyers have many firms to choose from they can put pressure to reduce quoted cost; they can leverage their position to get the best possible terms in their favor. Considering all the above-mentioned factors buyers have high bargaining power.
Bargaining Power of Supplier
Required supplies for the construction company are raw materials. Construction companies required material for large scale projects or multiple projects; they sign purchase agreements for bulk quantities at discounted rates. Most of the raw material items are set at fixed prices by regulators. Certain projects are at multiple locations spanning countries, so buyers have the option to choose from many local vendors at discounted rates. Economies of scale are against the vendors, they do not hold any bargaining chip; so their bargaining power is low.
References
China Railway Construction Corporation limited. (2020). Profile. Available at: http://english.crcc.cn/col/col21582/index.html
Fortune. (2020). Global 500. Available at: https://fortune.com/global500/2019/china-railway-construction/
Nikkei Asian Review. (2020). Industrial Services. Companies – China State Construction International Holdings Ltd., Inc. Available at: https://asia.nikkei.com/Companies/China-State-Construction-International-Holdings-Ltd
Nikkei Asian Review. (2020). Industrial Services. Companies – China Railway Group Ltd. Available at: https://asia.nikkei.com/Companies/China-Railway-Group-Ltd
Saidi, K.S., O’Brien, J.B. and Lytle, A.M. (2008). “Robotics in construction”. Hand-Book of Robotics, Siciliano, Bruno and Khatib, Oussama , eds., Springer-Verlag, Vol. 3, pp. 1079–1099