Corporate strategy of Arcelor: how to penetrate the Chinese market?Second world largest steel maker, Arcelor is the result of the merger between three European steelmaking companies in 2002.
Table Of Contents
) COMPANY DESCRIPTION 2
.1) Outlook of the steel market 2
.2) Corporate strategy of Arcelor: how to penetrate the Chinese market? 3
.3)Current financial performances 5
.4)Specific advantages of Arcelor 6
2) ARCELOR AND CHINA 7
2.1) General political and economic environment in China 7
2.2) Economic conditions in the Chinese steel industry 9
2.3) Main competitors and customers 11
2.4) Customers in China 12
2.5) Competitive advantages of Arcelor in China 13
3) CULTURAL DIFFERENCES BETWEEN CHINA AND EUROPE 14
4) WHY CHINA? 15
4.1) Arcelor in China: long term and short term objectives 15
4.2) Arcelor in China: tools to achieve long term and short term objectives 16
4.3) Arcelor in China: strategies to achieve long term and short term objectives 17
4.4) Arcelor in China: A cascade model 19
5) CONCLUSION 20
5.1) What are the challenges for Arcelor? What does the company should expect from the Chinese market? 20
APPENDIX............................................................................................................................. .22
REFERENCES........................................................................................................................27
) COMPANY DESCRIPTION
1.1) Outlook of the steel market
The market of commodities has experienced dramatic upheavals during the last years. The outstanding growth in China is soaking up every commodity available and therefore is pushing up the prices on every market. The steel market experienced a huge soaring in prices in 2004 due to a shortage, consuming almost a third of the global steel output (730 million Tonnes), China is the main cause of this trend.
Because it is still a low concentrated market, the supply is facing many difficulties and is reengineering all over the supply chain. Proactively, steelmakers have increased their production, multiplied the mergers and acquisitions, and developed some cartels to keep control of the prices. 2004 was an exceptional year as the prices literally skyrockets. However, the increasing competitive China's companies begin to jeopardize this balance. Developing the steel output, China is forecasted to be self-sufficient on steel in 2006. The steelmakers not only fear to lose of one of their more interesting customer but they now also have to fight against the extremely low-cost Chinese competition. Apparently this increase in Chinese production is not curbed either by the skyrocketing price of raw materials or by the Chinese Government directives. Considering that China is the first steel consumer, if the Chinese growth is lower than expected the market would be overflowed with metal and prices might fall. From a shortage, the steel market is now flooded with too many products, overproduction is lurking... Moreover, the iron-ore producers are very likely to go on increasing their prices, triggering a knock-on effect on the whole industry.
Prices threaten to fall at any moment, costs are surging; time has come to cut the costs of production, to merge the companies and to find efficient partnership with low cost countries such as China.
These strains are already visible on the metal market. A recent affair of a Chinese trader that used junk derivatives on the cooper market damaged the whole European Stock Market. The situation on the metal market is on the verge of explosion.
1.2) Corporate strategy of Arcelor: how to penetrate the Chinese market?
Second world largest steel maker, Arcelor is the result of the merger between three European steelmaking companies in 2002.
With a EUR 30 billion turnover, Arcelor hold a leading position in several markets such as automotive, construction and household appliances. The Group operates in four key market sectors: Flat Carbon Steels, Long Carbon Steels, Stainless Steels and Distribution-Transformation-Trading. It employs more than 90,000 people and its activities are spread over 60 countries.
To maintain its leadership, Arcelor focused its growth around three major axes: Cost leadership, Customer Loyalty and Entrepreneurship. The first axis will be studied in the next part that focuses on the financial aspects of the firm. The customer loyalty is a mixed between good relations to penetrate and secure some markets like the Chinese one and a monopoly situation (understand that Arcelor is big enough to make pressure on its clients, particularly in Europe). The entrepreneurship is reflected by a company born 3 years ago to conquer the world market. The fact that Mittal is now the world leader is a situation a group like Arcelor cannot tolerate because to be the first is in the core of its strategy, this leads to a high level of entrepreneurship and the series of acquisition we have assisted during this year.
As a world leader, Arcelor has already secured the European market. More than one out of two cars build in Europe is made with steel from Arcelor. But even if the financial results are strong and the market secured, such a company must definitely grow not to be pushed out of the market by its competitors. With an increase of 90% on the iron-ore market, the steelmaker cannot impact the whole increase on the price of its products. Already accused to maintain a real monopoly in Europe, the group should be relatively convenient with its clients no to be sued by Brussels for anticompetitive position.
Given this situation, Arcelor is acquiring a lot of mills and small steelmakers all over the world to control a production chain. Developing vertically and horizontally is the best strategy the group can have to both secure its market and to protect itself against huge price variations.
The current Chinese Metal Market is restructuring: the Chinese government entices small steelmakers from all over the country to merge and create economies of scales. This has led to the creation of some big Chinese champion in the metal market like Baoshan1. Even if this latter is still crippled with debts from non-productive branches, Baoshan is the sixth biggest steelmaker in the world and is likely to appear among the top 3.
Arcelor must penetrate the Chinese market. It already has a joint venture with Baoshan and Nippon Steel to run a $785 million plant in Shanghai. This partnership aims at creating stronger links with the would-be giant Chinese steelmaker. Indeed, one must not forget that the metal industry is the economic symbol of the success of the communist policy; the government is likely to protect its industry. This protection is reflected by the recent law enforced that prevents foreign companies to have a majority of shares in a Chinese metal manufacture. As a consequence, the European group should bargain its technical support against more shares in the Chinese market. Next step for Arcelor, after creating this venture, is to entice the Chinese government to permit the European steelmaker to have a majority in the Laiwu Company (a relatively important Chinese steelmaker).
The challenge Arcelor should take up is to find a niche on the Chinese market, in cooperation with the local manufactures which protect their market, considering the increasing price of raw materials and the hectic automotive market that is in an unstable phase (difficulties of supply, sensitive market that the government tries to regulate to prevent from being overwhelmed by foreign companies etc.).
1.3)Current financial performances2
Last quarter results are excellent for the company. Its financial strategy consists in reducing its debt and increasing substantially its growth through a value-creation. This means that the group wants to improve its stock market valuation which will give him the necessary financial leverage to realize mega-mergers. So far, Arcelor is the result of a mega-merger that will go on to give a real giant in the industry. The merger between the three European leaders enables the company to secure the European market. Now that merger is realized and the group is producing a sustainable growth, it must look for further acquisitions. First, its implementation in Latin America makes possible a real control of the iron-ore production many acquisitions are expected from this branch. Second, the rise of the Chinese giants cannot be overlooked; the group is currently trying to acquire 38% of the shares of Laiwu, a Chinese steelmaker leader. However, despite its relatively good financial results, this participation is far from being secured as shows the late law that enforced the Chinese government.
The 2005 results are even more outstanding regarding the increase in raw materials prices. It reflects the efficiency of the new worldwide Arcelor: an entity that achieved to control perfectly its supply chain. However, a deeper analysis of the results also reflects an unbalanced growth that cannot be sustainable. Indeed, the substantial increase in the EBITDA is due to a decrease in the costs and a successful reengineering plan. This only proves that the first stage of the consolidation of the company is a success: the cash flow from operation has increased thanks to a perfectly managed working ...
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The 2005 results are even more outstanding regarding the increase in raw materials prices. It reflects the efficiency of the new worldwide Arcelor: an entity that achieved to control perfectly its supply chain. However, a deeper analysis of the results also reflects an unbalanced growth that cannot be sustainable. Indeed, the substantial increase in the EBITDA is due to a decrease in the costs and a successful reengineering plan. This only proves that the first stage of the consolidation of the company is a success: the cash flow from operation has increased thanks to a perfectly managed working capital (evidence that the merger is a success, these results are appearing only few years after the creation of Arcelor). Now, the financial community is in the expectation: will the new acquisitions in China and Argentina lead to an increasing return on equity? The current negotiations with the Chinese authorities will play an important role and we can be sure that any disappointment would lead to a decrease in Arcelor's share prices. The high valuation of share prices in 2004-2005 is the reward for an internal growth (management of costs, of working capital etc.), to continue the trend the group must show the same ability to deal with external growth.
1.4)Specific advantages of Arcelor
Arcelor enjoys its particular situation in Europe as a monopoly to control the world market. Famous for its financial discipline, it didn't hesitate to cut its production during the beginning of fiscal year 2005 to prevent any overproduction on the market. The effects were a mechanical increase in high-end metal prices and lower variable costs for the company. Because of its position, no clients dared to complain of this increase of prices fearing retaliation from Arcelor.
Though the group is quite young, the companies that merged to create it were famous secular European steelmakers. Therefore it has a deep knowledge in the metal making. To compete with low cost Chinese products, Arcelor can boast to be the leader in high end metal products (stainless metal for the food industry for example). However this advantage is likely to disappear soon as the Chinese metal industries are literally catching up with the world leaders.
But the size of the group is not its unique advantage. It enjoys a particular feature of multinational management: Luxembourg - French - Spanish. This multicultural aspect is essential for any company that wants to expand worldwide. The high return of investment of the acquisitions realized in Argentina is just an example.
Because Arcelor embodies the real powerful and successful European company, it can rely on the support of the European Commission. It is probably its main advantage to penetrate the Chinese market. As a company it can bring there its high technical knowledge, as a European leader it enjoys strong political influences necessary to penetrate the Chinese market. An illustration of this is the speech that G. Dollé, CEO of Arcelor, held recently3. He confirmed that the acquisition of Laiwu is likely to happen, despite the recent anti-acquisition law, because there are many opportunities of "negotiations" with the Chinese authorities.
2) ARCELOR AND CHINA
2.1) General political and economic environment in China
China is currently one of the countries with the highest growth rate (9.1% in 2003). The economy is on a way of liberalization since the 90's as its entry in the WTO in 2001 shows. These economic reforms have been divided up with no clear blueprint but in a reactive way (and not a proactive one). For a fast economic growth the country has its overall national strength further enhanced and a joint development of its first, second and tertiary industries. Industry has now a dominant role since it accounts for 51.1% of the GDP and is mainly export-oriented. China is evolving and becomes a developed country with the increase of the service sector. China has kept growing mainly thanks to FDI that have provided capital, new technology, managerial skill, and training for labor. It has introduced modern managerial system, business practices and a legal framework for conducting business transactions. In addition it has provided competition in the domestic market, and competition has forced domestic enterprises to become more efficient. However some issues still exist and hinder the Chinese development. For example, the government fears that the economy overheats since the industry demands for raw materials make the prices rise. It results with energy shortage.
The Chinese government is still very implicated in the economy and State Owned Enterprises (SOEs) are still very pervasive since the share of these companies in gross industrial output was 41% in 2002. Some markets are regulated and foreign investment can be restricted or prohibited in many sectors. For example the acquisition of Chinese companies by foreign investors is very difficult.
The economy in general is still directed through five-year plan periods that describe the orientation of the economy. One of the main orientations is the reform of SOEs through mergers, bankruptcy or reduction of government ownership because these companies are not competitive enough at a worldwide level. The government wants also to reform the banking system which banks are crippled with bad loans contracted by SOEs. Another main orientation is the will to develop the economy in central and western China. The goal of all these reforms is to make national champions emerge: big companies capable of supporting their own brands on a global market.
Politically China is still very authoritative. The fourth-generation leadership began to take on the leadership in 2003 with Hu Jintao. Although there has been considerable reform of China's economic model - from a centrally planned economy to a market-oriented one - the same is far less true of the Chinese political system. Its leaders make all major policy decisions. China is facing a growing disconnection between the demands of its reforming economy and society - open to the outside - and a political system that is largely ill-suited to meet their needs. The growing disparity between urban and rural incomes, income gaps between the wealthy coastal regions and the poor inland, growing unemployment created as SOEs restructure and downsize, and official corruption are potential threats to stability4. China may fear some social unrest like in 1989 if the situation doesn't improve soon. Another particularity is the real power that local officials have. China is composed of 2 provinces, 5 autonomous regions and 4 municipalities all of which having a potential influence. There often are trade barriers between the different provinces to prevent companies from moving to another province.
Good relationships with the government at every stage are necessary for companies that want to implement in China. This is known as guanxi: Personal and friendly relations, without it nothing is possible in China. They take time to build and are based on trust and mutual benefits. They allow navigating the labyrinths of an extraordinary complex administration. This is not corruption even if corruption exists and can't be denied.
2.2) Economic conditions in the Chinese steel industry
The steel economy is a growing one (see appendix 3). In 2003, China steel consumption broke a new world historical record, its consumption volume accounted for one quarter of all global steel output and became the largest steel consumption market in the world. In 2004 China produced 275 million tons of steel5. China is at once the world's leading producer and importer of steel: it consumed 382 million tons in 20046 (see appendix 5). The Chinese government is very implicated in this sector that it sees as one of the flagship industries that drive the Chinese economic growth. That is why China just enacted new measures that aimed at developing but also protecting its steel output. For example, these rules forbid foreign steelmakers to take a majority share in Chinese ones. But it is only as a rule and policies can change very fast. Steelmakers are not allowed to undertake new construction projects and the People's Bank of China has raised bank reserve requirements twice this year for these companies. As officials said "The target is blind investment in redundant, low-level production capacity, which contributes to pollution and wastes resources"7. That means that large-scale steel companies are not hinder by those rules since they produce technology-intensive and high value-added steel products.
Another characteristic of this sector is the trend to concentration in order to make more economies of scale. That means bankruptcy for the smallest because of increased competition. Estimates of the number of steel makers in China range from 100 to 8008. Many of the smallest are expected to close, as the government tightens lending controls and emissions restrictions, and limits their access to raw materials. To meet their needs, Chinese steelmakers have been concluding increasing numbers of agreements, partnerships, and even acquisitions. Signature of long-term contracts with suppliers has provided them with supply guarantees even if that may imply sacrificing negotiating leverage on basic metal prices in case of a trend reversal.
2.3) Main competitors and customers
Competitors on the Chinese steel market are numerous but very different. First there are Chinese steelmakers whose size can vary widely. There are between 100 and 800 steelmakers in China. Most of them are local state-owned companies but concentration makes them bigger and bigger. For example, in Hebei Province, six state-owned steel companies will merge into two steel companies, Tangshan Iron & Steel and Handan Iron & Steel, each with an annual capacity of over 10 million tons9. Besides those, China has three emerging national champions: Baosteel, Angang and Wuhan. Baosteel is the mot promising. 6th world producer with 22 million tons in 2004, the group has become a major player in China where it is an attractive partner. Proofs are the partnerships created with big companies like Arcelor, Nippon Steel and ThyssenKrupp that each has a joint venture with it10. Like many of China's other national champions, Baosteel is ready to take its place on the global stage. That means more partnerships and it is looking for investment in Brazil. But at heart Baosteel is still an SOE, with all the inefficiencies, social obligations and political constraints this implies. The government is reluctant to let leave such a big company and is still really committed to Baosteel strategy. Angang and Wuhan (respectively 11.3 and 9.3 million tons11) encounter exactly the same problem except that they are on a lower scale.
Other competitors on the Chinese steel market are foreigners. Huge conglomerates have been built for the last decade and they now enter China, looking for potential markets and new alliances and acquisitions. The biggest one is Mittal with a capacity of 48 million tons12 (see appendix 4). This company is the result of the merger between Ispat International NV and LNM Holdings NV. It has actually been the first foreign company to take a stake in a Chinese owned steelmaker: it signed an agreement to acquire a 37.17% stake in Hunan Valin Steel Tube & Wire (n° 31 with 7.1 million tons) in January 200513. It has also stakes in many plants in China. Other big conglomerates exist all over the world. The main ones are the Japanese Nippon Steel, the South Korean POSCO, the American US Steel and the European ThyssenKrupp.
We can see that Arcelor has a lot of competitors, all eager to gain the first place on the steel market but through different strategies. The local companies search to acquire a critical size and a global influence through partnerships and alliances. The foreign companies want a bite of the Chinese market - China being also the main consumer - and create partnerships to enter that market in compliance with the business laws.
2.4) Customers in China
Customers for steel are numerous but the two main sectors that steelmakers supply are car manufacturing and real estate construction. Those two sectors are exploding in China and the Chinese government has to curb their expansion in order to prevent the economy from overheating. Nevertheless, those markets have already big sizes and demand for more steel. For car manufacturing, almost all the worldwide car brands have invested in China through JVs to enjoy low cost production (mainly labor) and an emerging market. Thus, from GM to BMW, from Kya to Renault, each of them has Chinese partners14. Those JVs are car plants that need a lot of different types of steel.
In the construction industry, the customers are getting fewer because of the new regulations. It is indeed becoming one of the most heavily regulated industries in China: the establishment and operation of construction related businesses are subject to a multitude of regulations, procedures, certificates and approvals. For example, engineers, designers, surveyors and contractors must each obtain a skill qualification certificate in their particular discipline which prescribes the size and complexity of projects that they can pursue and the nature of the work which they can carry out15. This type of indirect barriers forces the construction to focus on better quality and security. So it's not really damaging for steelmakers that just have to comply with the new demands in term of product quality.
Another application is packaging. This one is really increasing in China and could be the next dynamic sector for the steelmaker.
2.5) Competitive advantages of Arcelor in China
Arecelor has different competitive advantages depending on which competitors we are looking at. Against the Chinese steelmakers, its competitive advantages are its size that allows the company to realize economies of scale and to have a bigger cash-flow for future acquisitions. It also has the competences and skills to produce better quality steel and high value-added steel.
Against the foreign competitors, Arcelor has the advantage of being already implemented in China through different JVs which means that it already has good relationships and connections with the stakeholders of this industry, mainly the government. A last competitive advantage is the fact that Arcelor has developed a vertical integration through the creation of "Arcelor Steel Solutions & Services (A3S)" that groups all the downstream operations16 and that has more than ten subsidiaries in China. The company offers more than different types of steel; it provides also services (important service and logistics offer, expertise in the downstream promotion of steel solutions, added value contribution to commercially marketed steel products ...). This allows Arcelor to gain trust and loyalty of the Chinese customers: they appreciate the fact that their supplier offers them expertise and knowledge from foreign operations.
3) CULTURAL DIFFERENCES BETWEEN CHINA AND EUROPE
For this part, we used the book International Business, Environments and Operations, tenth edition (2004), Daniels, Radebaugh and Sullivan in order to see what types of differences can be expected.
The origins of the group Arcelor are deep-rooted in the European culture. That means that this company is totally "westernized" which implies several differences.
Arcelor seems to have a low power distance in its organization: it's a participative management. On the opposite, Chinese workers prefer a strong power distance which means that Arcelor should find a new way to manage its employees.
We can also say that the Western European culture is low-context and the Chinese one is high-context. That means that Europeans are used to going straight to the point. On the opposite, the Chinese think that peripheral information is valuable. It can have an impact on the way the negotiations are conducted. Arcelor must consider the fact that not speaking only about business isn't necessarily useless.
Arcelor must also face the guanxi issue. This type of connections might be compared to bribery, which is not. The company must understand that guanxi is a normal condition for doing business in China. Arcelor must create its own guanxi if it wants to succeed in China.
Another example is the fact that Arcelor has an individualist model whereas China has a collectivist one. It can have impact on the way you manage your employees and the way you motivate them.
4) WHY CHINA?
4.1) Arcelor in China: long term and short term objectives
Arcelor entered China to acquire market share in one of the faster growing today's economies. As we saw the steel market in China is increasing; its impressive growth rate let the company think at the Chinese market as a target one.
The huge market size of the country pushed the company to invest there, in order to increase sales and revenues, achieve wide presence within the country and become leader of the Chinese steel industry.
The problems the company faced in entering China were quite critical: Arcelor set up new operations in a totally different market compared to the European one. The market composition, dominated by State Owned Enterprises, made it even more complicated. The company was anyway able to enter the market mainly thanks to its technical skills.
On one side the company achieved its short term objectives through JVs and the ability to demonstrate its value to China: the company is profitable at the moment and gained a lot of market share since it went in China. On the other one, instead, they were not able to acquire some companies or set up wholly-owned subsidiaries through greenfield investments, because the legal and cultural barriers to overcome were huge. The company is on the right way to do it, but they can improve in terms of actual and perspective market share.
4.2) Arcelor in China: tools to achieve long term and short term objectives
Arcelor in China today is a company between the second and the third phase of investment17 (namely the country development and the global integration), with the key goal of improving the already estabilished integration of Chinese operations into regional and global efforts, but also further expand of the operations within the country. The achievement of the latter goal is not very feasible without improving the relationship with the government on the base of the purchasing power the company has and will have.
Having a strong brand awareness and a deep knowledge of the steel product, the company can become the main actor of the Chinese market, and can demonstrate to the government its willingness to cooperate in the nation interests.
Arcelor choose localities and partners with which set up Joint Ventures very carefully, even if it could not acquire the companies, because of the local legislation that did not allow to wholly own Chinese subsidiaries. At the moment the company reached an agreement with Laiwu steel, a Chinese steelmaker, for an acquisition, but the government is multiplying the intervention to restrain the foreign presence in the steel market. The first step to achieve the short term objectives is to overcome this threat improving the company's negotiation abilities and building stronger relationships with the local Government, that in turn will be more willing to give the company the permission to acquire local firms. improving the company's negotiation abilities.
Increasing the number of Joint Ventures is another possible tool to consider. Arcelor's strong relationship with Baoshan, thanks to the existing JV set up by the two companies, does not necessarily prevent the company to estabilish this kind of relationship also with Angang and Wuhlan. Arcelor already set up some other JVs with local entities, but these two companies, even being less considered from the government compared to the other local partner, because of their smaller size, have anyway a huge stake in the local market and can help Arcelor to put pressure and negotiate with China more efficiently.
Another core aspect that must be considered to achieve the profits and revenues objectives is culture. As we saw European and Chinese cultures differ in so many aspects. Arcelor should be able to find the right balance between the two to be both competitive and profitable.
Perception of the company is very important to the Chinese market, so the company should rely also on its figure and improve its Chinese connections: guanxi and strong brand image are core to improve its operations in China and achieve local success.
The last suggestion regards the people employed by the company: Arcelor should rely on some locals instead of only operate with home country managers. The impact on the market will be improved through this tool, because the company will show its propension to work in China's interests.
4.3) Arcelor in China: strategies to achieve long term and short term objectives
Since Arcelor presence in the country is substantive, and the strategy used by the company seemed to be the only available one, given the country background, the strategy we are going to suggest regards the future expansion of the company through the exploitation of the JV tool together with the Acquisition expansion strategy.
Arcelor can exploit all of its competitive advantages since the company seems to be the most powerful and skilled one within the market. Having superior competences and skills compared to the Chinese counterparts, the company can have the real control of the Joint Ventures it sets up. Moreover, some of them are 50:50, while some others are majority ones. It is arguable that having the majority stake in a JV does not mean that the company controls it, especially given the steel sector, that has a lot of governmental controls, but the company superior knowledge together with its stake will be a good way to have it.
Furthermore Arcelor has good relationships and connections with the industry main stakeholder, the government, thanks to the fact that the company entered the market before others foreign competitors. The last advantage we mentioned was the A3S, that shows the vertical integration of the company. The thing is that the company still has some core suppliers with which it should strengthen its relationship to be more efficient on the market and give a better image of stability.
The question now is: why the Chinese government would allow Arcelor to acquire some local companies? Arcelor, being one of the biggest world's players in this industry, has much more bargaining power compared to the other companies; moreover, losing a company like this the government will decrease a lot its exports as well as its balance of payment.
Showing the willingness to pursue a long-term strategy is also core for the company. The government will understand that they really wanna improve the country's conditions, without only caring about immediate profits. From a political point of view this is a core strategic issue (the Citibank case showed us how powerful is this instrument when the companies operate in China. Citibank improved it and made it part of its whole strategy. The company succeded in implementing its philosophy: "be totally global and totally local").
Finally, defined all the aspects on which the company should focus on, we are gonna suggest a long-term strategy that can help Arcelor to acquire more control on its Joint Ventures, majority and minority ones.
The model we considered to be feasible to shorten the development time within the Chinese market is a cascade model, that will allow us to increase our stake into new Joint Ventures and improve our position.
4.4) Arcelor in China: A cascade model
The Chinese law does not allow Arcelor to have wholly owned subsidiaries in the country. The only way to do it, at the moment, is to require Governmental approval. The problem is that the Government already stepped in to limit foreign companies ownership in the local once.
Our suggestion mainly comes from the company general policy. All over the world they acquire smaller companies to let them become part of the group. Since in China this is not possible, we tried to find a way to increase our stake into the JVs with the future perspective to acquire them (when the law will allow that).
The strategic plan is the following: when setting up new future JVs the company must do that with one of the JVs already owned in China, possibly a JV in which the company has the majority of stake, a powerful partner and, most important, the control. This system will be used also for the subsequent JVs (See Appendix 6), allowing the company to finally have an almost wholly-owned subsidiary, really easy to acquire when the Chinese policies will further open to the market.
Following this strategy the company will circumvent Chinese legal constraints and will be able to gain more power within the country, since it will expand more.
Further advantages of this strategy are that the company will: increase the revenues coming from the JV, since it owns most of its stake; pursue a strategy closer to the corporate directives, because it will have less pressure from the partner of the first JV; spend less time and resources in the cooperation with another partner, since it will be very limited; exploit the guanxi network built until now for its own objectives.
The strategy, anyway, presents also a few limits, mainly because it will possibly worry the government about our real intentions: do they want to pursue their own objectives or do they want to operate in the country's best interest? Moreover it will not allow Arcelor to exploit other local companies' connections. If the European company set up a JV with Angong or Wuhan, it will be able to use also their influence for their business. Acting through this cascade model, instead, they will rely only on their own connections and abilities.
The last weakness is that the company will move from a brownfield to a greenfield operation, since the more JV it will set up, the more companies there will be on the market. This will further increase the capacity of an industry in which the market growth is still present, but it is decreasing, since the product is living going through its maturity stage (Product Life Cycle Theory).
To conclude we can say that this tool can be very useful to the company, but Arcelor must use it carefully and without pushing it over the limits; in the latter case it can carry a lot of risks with him.
5) CONCLUSION
5.1) What are the challenges for Arcelor? What does the company should expect from the Chinese market?
The transition of the Chinese economy from a Totalitarian to a Command one is today a core issue. China maintained its Totalitarian govenment while started to liberalize its economic market.
This transition was embraced by most of the Multinational companies operating on today's market, and involved all the industries, including the steel one.
Arcelor is one of them, but the knowledge advantages on the competitors, the strong brand name, the relationship with the Chinese Government and the leading position in the world market, make the company one of the possible winners in the Chinese market.
The following actions might allow the company to succeed:
- Set up JVs with the major players of the market; the advantages are much bigger compared to the advantages that smaller players can bring to the company, especially in a market like steel;
- Set up JVs with their own JVs (cascade model);
- Acquire companies as soon as the state allows them to do that.
The Chinese steel industry can be dominated by Arcelor if they will use the right strategy.
APPENDIX
Appendix 1 - Consolidated Income Statement
Appendix 2 - Consolidated Balance Sheet
Appendix 3 - World crude steel production:1950 to 2004 (million metric tons)
Appendix 4 - Top steel-producing companies
We must add that Mittal is the first steelmaker in production value. That means that its output is more value-added.
Appendix 5
Appendix 6 - Cascade model
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The Great Transition
Baoshan is the State Owned Company. In the following report the authors will refer to Baoshan or Baostell, the Shangai traded branch of Baochan, without making difference between the two entities as it has no real impact on our analysis.
2 Cf Appendix 1 & 2 for the finacial statements
3 M Dollé in Yahoo!Finance 10/14/2005: Arcelor croit avoir un accord de principe (french article)
4 Craig Allen, Chapter 3 Political Environment (2003), China country commercial guide, retrieved November 20th on http://strategis.ic.gc.ca/epic/internet/inimr-ri.nsf/en/gr117837e.html
5 The wrong worry (3/12/2005), The Economist, Issue 8417
6 Ibid
7 Liu Haoting, China's steel sector still red hot (2004-05-09), Business Weekly, retrieved on November 20th in http://www.chinadaily.com.cn
8 China mills steel for growing competition at home (2005/04/14), Muzi, the Digital Great Wall, Retrieved on November 20th in www.mizu.com
9 Hebei steel companies to consolidate (2005/11/17), China Economic Net, Retrieved on November 20th in http://en.ce.cn/Business/Enterprise/ 200511/17/t20051117_5239260.shtml
0 China's Rising Star In Steel (2005/01/26), Business Week Online, Retrieved on November 21st in http://www.businessweek.com/magazine/content/04_04/b3867041.htm
1 World Steel production in 2004 (2005),World Steel in Fact, retrieved on November 22nd in http://www.worldsteel.org/media/wsif/wsif2005.pdf
2 Ibid
3 Mittal takes key China steel stake (2005/01/14) , Times Online, retrieved on November 22nd in http://business.timesonline.co.uk
4 Jade Fu, China's Detroit? (2005/03/01), China International Business, retrieved on November 22nd in http://www.cityweekend.com.cn/en
5 David Cox, China's new construction project management measures (2005/08/11), MinterEllison lawyers, retrieved on November 20th in http://www.minterellison.com/public/connect/Internet/Home/Legal+Insights/Articles
6 Arcelor's areas of activity (2005), Arcelor website, retrieved on November 20th in http://www.arcelor.com/
7 The Great Transition
Bus 431 Final Project
2
