The Book on China Size: 9,596,960 square kilometers Capital: Beijing Currency: Renminbi Population: 1.3 billion Labor force: 744.3 million Population growth rate: 0.6 percent per year Life expectancy: 71.86 years Age composition: 0-14 years, 24.3 percent; 15-64 years, 68.4 percent; over 65, 7.3 percent China is the world’s largest producer of steel, coal, cement, fertilizers and household appliances. In 2004, industrial output reached RMB 6.28 billion, an increase of 11.5 percent over 2003. Exports to the United States totaled $125 billion last year, compared with $92.5 billion in 2003. Source: HSBC (Hong Kong and Shanghai Banking Corp. Ltd.)

While some metals industry executives are methodically assessing the risks and opportunities of North American investment in the vast mystery that is China, the Chinese are moving fast to acquire large publicly held assets in the Americas.

In late June, for example, Chinese oil producer CNOOC Ltd. bid $18.5 billion to acquire California-based Unocal—sending political shockwaves from the canyons of Wall Street to the National Mall. It is only a matter of time before Chinese interests buy big into the North American steel market, experts say.

American attitudes toward China are colored by much contradictory information, opinion and analysis—some characterizing China as a land of booming emerald cities and unlimited possibilities, others painting it as the fiefdom of an evil regime with wicked plans to control the world economy. Oh my! It’s no wonder that service centers in North America seem hesitant to set out on the road to such an unknown. But those lion-hearted few who have dared travel to China to take a peek behind the curtain for themselves seem very excited by the possibilities.

“I have been to China—to Shanghai and Beijing,” says Michael Hoffman, president of Macsteel Service Centers USA, Newport Beach, Calif. Hoffman visited service centers, producers and manufacturing operations. Macsteel does “a fair amount of business with China,” he says, mostly to import products.

“There is a substantial amount of independent service center and processing activity in China. Some of the big service centers in China are as big as the largest in the world,” he says.

Large manufacturers from all over the world—potential service center customers—have located or relocated to China, including Japanese, Korean, Brazilian, American, South African and European companies. “Everybody in the steel service center and metals business is doing their best to be well informed,” Hoffman adds, “so they can develop a feel for how they expect events to unfold in China.”

Whether service centers follow their manufacturing customers to China depends on a number of factors, such as critical mass, knowledge of global procurement, business fundamentals, timing and realistic expectations.

“There are already some very large and sophisticated service center companies in China,” Hoffman says. Although supply chain management in China is less sophisticated than in the United States, “many are actually able to offer a certain amount of just-in-time delivery.”

The most modern operators offer a wide menu of value-added processing services. “They are moving forward fast,” Hoffman says.

Macsteel is considering allocating some resources toward a joint venture of some kind in China. “We are not yet sufficiently comfortable with the process to make a hard decision. I believe many companies are at this stage.”

There are ways to get one’s feet wet, he adds, such as offering business assistance programs, technology swaps, or supply chain management and inventory control techniques. “With time, that might lead to more ironclad relationships.”

In five years, Hoffman predicts, “you will find that American distributors are more heavily engaged in China than they are today. And vice versa. It will be seen as a development opportunity.”

TW Metals, headquartered in Exton, Pa., has sales offices in Singapore and Yokohama, Japan. Bob Mraz, vice president of sales and marketing, says the company acquired Philip Cornes (Sea) Pte. Ltd. in Singapore about four years ago.

“We have a sales office in Yokohama, and we handle Japanese orders out of Los Angeles. We have an agent—an ex-employee—who is running an agency in China, and we have the whole Asian opportunity under intense scrutiny,” he says. The sales agent is laying groundwork.

TW Metals’ executives believe that China will become both a significant customer and a significant supplier. “It will be a couple years before we understand what our best strategy will be in China. But Asia is of high strategic interest to us, and we are looking into multiple areas.”

For example, many U.S.-based companies, such as Boeing Corp., have offset obligations in China, Singapore and Korea and are migrating work into the manufacturing base there, he continues. “Those companies are either purchasing material from us here in the United States or from our locations in Poland, the U.K. or France.”

However, China is a huge country with considerable barriers to developing a national supplier program. “They tend to be very regional, with regional airports and regional ways of doing business. Even the major mills are still very regionally focused and influenced. If you open any one location, it may not necessarily gain you easy access and trade into another. If you open in the wrong city, you may not have the ability to sell countrywide from that city,” explains Mraz.

In countries where TW Metals has set up shop, it sought out one or more launch customers that were committed to purchasing well-defined products over a certain period of time. “Those customers are the platform on which we build the business.

“We don’t want to take one big leap,” he says. “We want to take very rapid baby steps. And if we need to make a course correction, we can do it with our feet on the ground and not in mid air.”

The early adopters take the biggest risk. “You can be leading edge or you can be bleeding edge,” says Mraz, who plans to spend a few weeks in China this fall to evaluate how TW Metals’ exploration has fared so far, and to determine “how we might deploy there.”

Huaye: A case study
Huaye Iron and Steel Group is the prototype of the modern Chinese steel supplier. Headquartered in a suburb of Shanghai, with an energetic young workforce, the company is led by 37-year-old Gao Feng.

Huaye is one of three types of service centers that operate in China, explains Wuiping Yap, the company’s North American representative. The first is a subsidiary of a steel mill, like Baosteel, which has its own distribution network. The second type is a joint venture with a foreign mill, like POSCO, ThyssenKrupp or JFE Steel.

“The Japanese have a much bigger presence in China than the Americans. They are much closer geographically and have much higher stakes in China than the United States has,” Yap says.

The third type is an independent, locally owned and regionally based company such as Huaye. “Most of these have only one or two locations,” she notes.

Huaye is an exception with nine locations.

Huaye was founded a dozen years ago. It is a full-service supplier, offering steel processing, warehousing, distribution and logistics, operating its own fleet of trucks. The metal centers are concentrated in the major industrial cities along the eastern seaboard and in central China, such as Shanghai, Chongqing and Nanjing.

The company includes an international trading operation, trading a variety of steel products among various countries—especially India, Russia and Europe. Its main focus is the processing and distribution of flat-roll, however. Processing services include cut-to-length and blanking, shearing, slitting, sawing, stamping and fabricating. Customers are typically small and medium-sized manufacturing firms.

Huaye Iron and Steel has a central inventory management system on line, “so all their locations can access the inventories through the system. They track it pretty closely so they can tell you where the [inbound or outbound] shipment is and what time it’s going to arrive. That is pretty advanced for a Chinese company,” Yap remarks.

Fish market, steel market
China features another type of buying and selling environment that may seem highly unusual to Westerners. In large cities, “you have a spice market, you have a fish market and you have a steel market,” according to Yap.

Such markets are set up in Shanghai, Beijing and Guangzhou. The Lecong Steel Market in Guangzhou encompasses an area of 5.7 million square meters and consists of 90 companies employing about 3,500 people, reportedly making it the largest steel-distributing center in China.

“Lecong is pretty huge,” Yap confirms.

One of the companies at the Lecong Steel Market is South & North Trade Center Co. Ltd., established in 1997. The company sells and processes tinplate, silicon steels, electrolytic panels, cold-rolled and prepainted panels, zinc-plated panels and other products. It has a 20,000-square-meter warehouse open 24/7, complete with a 10-ton crane, 100-ton electronic floor scale, high-precision slitting and leveling equipment, and delivers with its own trucks. The company claims annual shipments of 100,000 tons to about 300 customers in the Pearl River Delta.

Also formed in 1997 and based at Lecong is Nanbei Steel Trading Center Co. Ltd., a “star agent” of Baosteel, selling tinplate, silicon steel sheet, electrolytic plate, cold-rolled plate, zinc-plated steel, chrome plate, high-speed phosphatizing wire and other products. Nanbei also has a 20,000-square-meter warehouse and offers some processing services.

When Huaye Iron and Steel executives met with U.S. steel traders, they asked the Americans whether they, too, have office buildings where all the different traders are housed together, Yap recalls. “Our American participants were horrified, saying, ‘No way, we are competitors. We would shoot ourselves.’ But in China, the trading firms sit in the same building.”

Yellow brick potholes
Those who want to open a satellite location or joint venture in China face significant obstacles, notably the language, and not only for English speakers. “Technically, everyone should speak the national Mandarin language. They don’t,” says Yap.

A much larger problem is transportation. While the eastern seaboard is well developed, the internal, central infrastructure is not. “You see six-lane highways, but once you get out of the city, the roads are horrible. In many cases, there are no roads. That makes distribution and logistics a little difficult,” she adds.

China relies heavily on river transportation, especially in the central and western regions. That’s why a lot of mills sit on river ports, and many actually own the port. Steelmaking facilities “are either close to ports, railways or iron ore mines,” says Yap.

China’s central and provincial governments play a role, in some way, in all business operations, she continues. China is basically a capitalist economy with a communist government. To understand any industry in China, one has to understand the macro policies of the central government, then the culture, and then look at how the policies actually affect business operations, she advises.

Charles H. Blum, president of International Advisory Services Group Ltd., Washington, D.C., who has led American steel industry delegations to China, adds that banking and financing can also be problematic.

“The cynical view is that there is no distinction between the central and regional governments and the banks. The government really controls the land, the credit, the imports and exports. The financial system is so immature—and compromised by favoritism—and the stock market is so underdeveloped.”

China does not have the cradle-to-grave socialism as in the old Soviet Republic. “There is no pension system. People are extremely insecure,” Blum says.

The role of the government in the Chinese economy is pervasive, he continues. “It’s not centrally planned, and provincial governments compete with one another” for funds, job creation, etc. “They all try to work their will on the central government, which is trying to put the brakes on the economy and slow things down. At the same time, the local governments are all trying to expand.”
According to several sources, the country frequently suffers from energy shortages. These sources also cite increasing pollution, a large and graying workforce and the decline of the public health system as problems in the making.

Even with barriers in language, culture, policy, transportation and financing, the potential of China is great, Blum says. “Finding solutions to get around these constraints requires systems, efficiency, planning, technology. There are many ways to accomplish this.”

The distribution system in China is evolving rapidly but unevenly, Blum observes. “The Chinese need some real help on supply-chain management. There is huge inefficiency. There is a lot of wasted capital. An American-style service center function could be a real boost to them.”

He predicts the Chinese steel industry is headed toward more, and more modern, value-added service centers.

Meanwhile, “there is so much inventory lying around China. The capital costs of that have to be quite substantial. The concept of on-time delivery is untested. Only suppliers that have settled in the same city as their customers could promise any type of just-in-time program.”

Japanese and Korean metals suppliers have done just that by locating near their customers, he says. “You cannot do that over long distances. Five hundred miles in China is a huge journey.” But the radius for deliveries will expand as major infrastructure projects are completed.

The Chinese people “are highly entrepreneurial, and try to get around the constraints,” Blum says. China’s transformation, on a scale never attempted in human history, is “occurring with unbelievable energy, vision and discipline.”

He sees an enormous amount of opportunity for Americans. “When you look at this vast industry, what hits you between the eyes on a first visit is the size of it, the dynamism, the ambition. It seems the future is totally unlimited.”

For companies that know how to manage inventory, to process to end-users’ specifications and hit that just-in-time delivery target repeatedly, “there is a great future in China,” he asserts.

For a skilled North American service center chain that desires to do business in China, Blum recommends the company recruit promising young Chinese talent, bring them to the United States for a couple years to train them in their systems, then return them to China to open up a facility.

The Chinese are eager to learn, he says. “There are many well-educated people who are very open to the West. They admire American know-how. Everywhere you turn in China, you see markets that could be developed. If the Chinese can get their metals needs met, they will grow. That’s the great potential.”

Though there’s no place like home, there’s no place like China now, either.