Editor's Note: Entering 2017, two sentiments pervade social media: some employees of central SOEs proudly showcase their companies' achievements, excited about the leapfrog development in 2016 and the goals set for 2017; while some industry insiders, quoting classics, assert based on the 2016 construction industry's performance that 2017 will usher in a new 'winter' for the industry, with pessimism filling the screen.

Which sentiment is closer to reality? Will the construction industry enter a new 'winter' in 2017? What is the new development landscape for the industry? Are there still opportunities for enterprises, especially small and medium-sized ones? Views on these questions may determine the course of enterprises in 2017 and beyond.

Is 2017 a 'winter' for the construction industry?

Let's look at some data:

According to the National Bureau of Statistics, in 2016, the national construction industry's total output value was 19.3567 trillion yuan, a year-on-year increase of 7.1%, higher than the overall economic growth rate of 6.7%. Historical data show that after the trough in 2015, the overall growth rate of construction output has shown a good trend of stabilization and recovery. 

In 2016, national fixed asset investment (excluding rural households) was 59.6501 trillion yuan, a nominal increase of 8.1% over the previous year (actual growth of 8.8% after deducting price factors). Historical data show that since 2010, the overall growth rate of fixed asset investment has been declining significantly, which is not good news for many enterprises relying on government support. In the future, they must change their development thinking and gradually move towards the market. 

In 2016, the national construction area of buildings was 12.64 billion square meters, a year-on-year increase of 2.0%. Although it recovered somewhat from 2015, the effect was limited. According to statistics, there are currently tens of thousands of small and medium-sized construction enterprises in China, mainly engaged in building construction. Under the reform orientation of 'weakening enterprise qualifications and strengthening individual practice qualifications', the industry entry threshold has been further lowered, leading to intensified low-level competition. The competition in the building construction market has become white-hot. This is why many small enterprises cry out that the industry is gradually entering a 'winter'. 

According to the Ministry of Commerce, in 2016, China's foreign contracted projects completed a turnover of 1.05892 trillion yuan (equivalent to 159.42 billion USD, a year-on-year increase of 3.5%), and newly signed contracts amounted to 1.62079 trillion yuan (equivalent to 244.01 billion USD, a year-on-year increase of 16.2%). In 2016, the US Engineering News-Record (ENR) magazine published the list of the top 250 international contractors for 2016, with 65 Chinese companies on the list, continuing to rank first in number among all countries. The total turnover of listed Chinese companies was 94.62 billion USD, an increase of 4.5% over the previous year. It must be clear that this is the achievement of the 'Chinese team' against the backdrop of global economic downturn, sluggish international engineering market, and reduced international business for half of the contractors.

It can be seen that under the Belt and Road Initiative, China's construction industry 'going global' achieved remarkable results in 2016. It is reported that from January to October 2016, Chinese enterprises signed 6,877 new contracts for foreign contracted projects in 61 countries related to the Belt and Road Initiative, with a total contract value of 84.39 billion USD, a year-on-year increase of 30.7%, accounting for 51% of the total new contracts for foreign contracted projects in the same period. This shows that in the 'winter', many enterprises have still achieved rapid development by going global.

In addition, according to the National Bureau of Statistics, in 2016, China's infrastructure investment (excluding electricity, heat, gas and water production and supply) reached 11.8878 trillion yuan, an increase of 17.4% over 2015. Historical data show that in 2014 and 2015, infrastructure investment achieved growth of over 15%, marking that infrastructure is gradually replacing building construction to become a new growth point for the construction industry. 

Therefore, from the data, the traditional building construction market is shrinking significantly, but on the other hand, the infrastructure construction market represented by PPP projects and the overseas market under the Belt and Road Initiative continue to gain momentum, becoming new development hotspots for the construction industry. It can be seen that in 2017, enterprises mainly engaged in building construction will inevitably fall further into 'winter', while those that seize new opportunities in transformation will achieve new development.

The construction industry is a 'policy-driven market'. To understand the development situation of the construction industry, one must recognize the overall reform direction led by the state. Looking back at the reform process of the construction industry in 2016, the official implementation of the 'VAT reform', the step forward in qualification reform, the pilot reform of labor employment system, the substantive progress in promoting prefabricated buildings, and the official launch of the 'four databases and one platform' all indicate that the construction industry is moving towards the trend of 'marketization, rule of law, and planning'. This means that under the new normal, the extensive development model of the industry as a whole has entered a 'countdown to death'.

At the same time, it should be noted that the traditional construction industry has gradually moved from an incremental era to a stock era, and building lifecycle management will receive increasing attention. According to expert estimates, the stock market size of China's construction industry is about 18 trillion yuan. In the future, construction enterprises will gradually transform from design and construction to maintenance, operation, and renovation, providing value-added services for buildings, which will be an irreversible trend.

Against this background, looking at the overall development trend of construction enterprises in 2016, it can be found that industry differentiation has already emerged. First, with the shrinking housing construction market, enterprises sticking to the main business of housing construction are struggling to survive, most have fallen deep into the mire of having no projects to do and are on the brink of bankruptcy. Second, among enterprises seeking transformation, divided by whether they have financial strength, investment capacity, and operational capacity, some have already demonstrated competitive advantages in areas such as subways and underground utility tunnels. From the perspective of enterprise composition, central SOEs represented by China State Construction and China Railway Construction have begun to show their edge in competition by virtue of their own financial and management strength, seizing most of the high-end market share. Most small and medium-sized private enterprises have been left behind by this round of infrastructure development opportunities.

Where are the development opportunities for small and medium-sized construction enterprises?

In recent years, during multiple in-depth enterprise surveys conducted by this journal, most small and medium-sized construction enterprises often describe the market as 'worse than before', perceive their own situation as 'near death', and hold 'deep doubts' about transformation. Theoretically, compared with large enterprises, small and medium-sized enterprises should have the advantage of being 'small enough to turn around easily', but in fact, most small and medium-sized enterprises find it difficult to escape 'path dependence' and still hope to return to the 'good old days' of 'relationship competition'. What is certain is that under the new normal, the era of universal profitability for construction enterprises has passed, and the myth that construction enterprises will never go bankrupt will be broken. Without changing their mindset, even if opportunities are presented, these enterprises will find it hard to seize them.

Adjust business philosophy. Currently, most small and medium-sized enterprises have not shaken off the extensive development mindset. Some enterprises in certain regions even still adopt the development model of collecting management fees through affiliation. Under the impact of major trends, these enterprises will only face bankruptcy in the future. Enterprises should establish correct business concepts, break through the mental constraints of relationship competition, and focus on capability competition.

Accurate positioning, seize niche markets, and build unique brands. In the 'golden age' of construction industry development, almost all enterprises aimed to 'become stronger and bigger', and horizontal extension of the industrial chain became an important strategy for enterprise development. But at present, the optimal strategy for small and medium-sized enterprises is not to find new opportunities or blindly expand the industrial chain, but to precisely position themselves, focus on segmented fields, expand market share by enhancing competitiveness, and build well-known brands in the industry.

Create new value through innovation. Small and medium-sized enterprises have weak market competitiveness. To gain new growth points, they must continuously enhance their innovation capabilities through vertical extension of the industrial chain, bringing new business and profits. Currently, capable private enterprises have begun to build innovation capabilities along the vertical industrial chain through acquisitions and other means to expand secondary and tertiary business operations, with remarkable results.

Thinking determines the way out. Fundamentally speaking, enterprise development is influenced by favorable timing and geographical conditions, but the more important determining factor is the thinking of 'people'. It can be said that 2017 will be a 'winter' for some enterprises and a 'warm spring' for others, because the decision-making power on how to develop lies in the hands of different enterprises.