Boao Forum for Asia 2013 Annual Conference will be held from April 6 to 8 in Boao, Hainan Province. Recently, Boao Forum for Asia's magazine "Boao Observation" teams up new institutional economics originator Ronald Coase, Nobel Laureate Edmund Phelps, famous economics Zhang Weiying, Yu Yongding, Chen Zhiwu and raises questions to one hundred well-known entrepreneurs in Asia. These problems are finally condensed to six core topics: innovation, corporate diversification, internationalization, reform and entrepreneurs' responsibility, global opportunity and its connection with business and economists' function. Here we publish Baosteel Group Co., Ltd. chairman Xu Lejiang's two signed articles on internationalization and innovation in reply to economists' six questions published on "Boao Observation" official website to satisfy our readers.
Internationalization has become an irreversible trend for Chinese enterprises because economic globalization has pushed market across national borders for a long time. According to the principle of comparative advantage, all the countries around the world have been incorporated into the division of labor. In the context of China's economic transformation and general capacity excess, internationalization is Chinese enterprises' only solution in future.
Baosteel's Internationalization Road
As for Baosteel, we have long realized the importance of "going out". As early as late 1980s and early 1990s, during Baosteel's initial production period, we adhered to the principle of 10% exports. At that time there was steel supply shortage in Chinese market and the domestic market price was much higher than the international market, thus exports meant loss of benefit. Of course, at that time there was the requirement of exporting and earning foreign currency, but more importantly, we hoped to understand international market users' needs through exports, cultivate overseas customer base as early as possible and lay the foundation for future international operations.
In 2001, Baosteel paced the first step of capital internationalization. In that year we invested an iron ore in Brazil and the next year, a mining enterprise in Australia. During subsequent years, we invested several resource companies. Although investment in overseas resources is a form of capital internationalization, we have always believed that the purpose of this capital internationalization is to ensure domestic production raw material security and it is essentially domestic business thinking.
After 2006, we began to explore a true sense of capital internationalization, i.e. investment in overseas steel production. After repeated comparison and screening, we decided to set up a 5 million ton whole process steel mill with a local Brazilian mining enterprise with 50/ 50 equity ratio and incorporate a joint venture company. After roughly two years' preparation, we were faced with problems of location selection and EIA of the new steel mill and the two sides' contradictions and differences gradually deepened. With continuous change and breakthrough in investment program and investment budget and coupled with the sudden global financial crisis, we had to abandon this overseas manufacturing investment.
Personally, I think the traditional manufacturing in China is likely to become the main competitor in global market, including iron and steel and its downstream industries. Last year, China's steel exports exceeded 4.5 million tons, which was more than the entire production of Baosteel Group. Such a large scale export is difficult to sustain and is bound to encounter more trade friction, yet without exports, China's large steel overcapacity situation will become more serious. Thus, transferring part of China's steel production capacity surplus is an inevitable trend and it is also in line with the principle of circumventing trade barrier with territorial operation. Similarly, China's steel downstream home appliance, automobile and construction machinery industries are all equipped with strong international competitiveness and strong internationalization will. In this sense, Chinese enterprises' cooperation in going out together in this industrial chain has great significance.
International Challenges
From Baosteel's failure in its first overseas manufacturing investment, we can find challenges faced by Chinese enterprises in internationalization:
Firstly, we lack international experience. It's only a short time since Chinese enterprises' going out. We have no experience to draw on either in the choice of partners or in single foreign investment and we will inevitably make detours.
Secondly, the challenge of cultural differences. Chinese enterprises are accustomed to carry out international operations with domestic business thinking and follow the domestic mode in terms of government relations, staff management and community relations and are bound to run into obstacles.
Thirdly, the challenge of talent shortage, especially shortage of professional managers versed in laws of different nations, international capital operation and globalization.
Fourthly, Chinese enterprises lack brand image. Especially, Chinese manufacturing does not possess famous global brand. Without famous brands, Chinese enterprises' going out path will be more circuitous.
In addition to the common challenges encountered by China enterprises, there are some special challenges faced with steel enterprises: First, the land acquisition challenge. Steel industry is land-intensive. Especially, whole process steel mills occupy a lot of land. In international community with land privatization as the main feature, the problem of land acquisition in investing in such steel mills is very difficult to solve. Secondly, environmental challenges. As a typical high consumption, high emission industry, steel industry is subject to strict access restrictions even in emerging countries and EIA before investing is most demanding.
The key to overcoming these challenges is that enterprises should cultivate skills and improve competitiveness. Chinese enterprises should not only build first-class product brand, but also establish first-class corporate brand. A Chinese enterprise with sense of social responsibility and integrity and outstanding quality possesses a passport to the world. Of course, our national brand is also very important. The repeated investment discrimination endured by China's state-owned enterprises in the process of internationalization show that there is still much room for improvement for our national brands.
Internationalization Does Not Mean That the Focus Is on the "Outside"
Whether an enterprise should emphasize on domestic market or overseas development depends on domestic and international market environment and the ehterprise's own ability.
The steel industry is highly correlated with macroeconomic industry. China's economic growth has come to a turning point at present, while in the past 30 years, the high growth trajectory of China's iron and steel industry fitted with that of China's rapid economic growth. Thus, along with China's macroeconomic transformation, China's steel industry also faces the pressure of industrial upgrading. It can be said that in the past, China's iron and steel enterprises including Baosteelwere busy with operation and acquisition in domestic market, seizing the domestic market cake and did not have time to go out and implement international operations. At present, external environment starts to force Chinese iron and steel enterprises to go out.
However, the ripening of external conditions for going out does not necessarily mean that China's iron and steel enterprises focus on overseas business. On my personal judgment, despite the fact that China's steel industry has entered the slow growth low-profit era, domestic market opportunity is still greater than overseas market. Besides this is a familiar market with less risks and huge potential.
Firstly, there is still much room for development for China's urbanization and industrialization. New urbanization and industrialization will inevitably bring about steel demand structure changes. Even in future the less than 5% of domestic steel demand growth is also a high speed within global scale.
Secondly, the internal integration and restructuring of the Chinese steel industry is far from complete and there are more opportunities than in overseas. China occupies nearly half of the global steel asset stock. At present there are problems such as low industry concentration, disorderly competition and backward structure and there is large internal space optimization. If we cannot be successful in domestic merger and reorganization, how can we achieve good results in overseas merger and acquisition? This is Chinese iron and steel industry's "quieting domestic trouble before handling the foreign ones" international principle which I have consistently adhered to.
Thirdly, despite the overall capacity surplus of China's iron and steel industry, there exists obvious unreasonable regional distribution and irrational product structure and there are still domestic investment opportunities. That is why over the past few years we adhere to investment in the construction of Zhanjiang steel mills. One of the reason is the steel supply shortage in southern China and the other reason is that Zhanjiang steel mill product structure is very different form those of existing steel mills and that this enterprise has Southeast Asian market radiation function.
In sum, Baosteel's business focus is still in China. The domestic market does not lack in opportunities compared with overseas market and the risk is much smaller. But that does not mean that we do not have any international business. We have learned from lessons of failure in overseas manufacturing investment a few years ago. We follow the principle of gradual and orderly progress, expand steadily international operation proceeding from steel manufacturing terminal procedure with small amount of investment. We have determined the development principle of "merger and reorganization in mature market and greenfield investment in emerging market". Locating North America, Southeast Asia, South Asia (India) as the main target area, with advantage product as the starting point, Baosteel's international operation will have new breakthrough in near future.
