Case 1-1: Zhang National Steel Company

Case 1-1: Zhang National Steel Company
Liu Hong, Director of International Accounts at the Zhang National Steel Company, has just been summoned by the new company chairman. He is expected to provide viable solutions for the company that will enable it to compete effectively in an increasingly saturated international steel market. China’s steel production is growing at breakneck pace. Its rapid growth is posing serious threats to the industry, and Zhang National, one of the larger recently privatized steel companies, is part of the problem. When Mao Tse Tung ordered an increase in the steel production as part of the Great Leap Forward, people left their fields, abandoned their work in agriculture, and fled to the large steel mills that produced millions of tons of useless substandard steel. Today, an enterprising China is taking another great leap, investing in industrial establishments, especially in the steel industry. The old, large steel mills have been privatized, becoming more efficient and producing high-quality steel, and investors are keen on banking on new and profitable steel mills.
According to industry reports, China produced 419 million metric tons of crude steel in 2006. This represents an increase of 314 percent from 101.2 million metric tons produced in 1996, when it became the largest steel producing country in the world for the first time. Today, China accounts for almost 34 percent of world steel production. The Asia region accounted for almost 54 percent of world crude steel production in 2006, up from 38 percent a decade earlier. The world total production of steel increased from 847.5 million metric tons in the year 2000 to 1,239.50 million metric tons in 2006. And with steel production in the Asian region growing at breakneck rates, it is predicted that there will be an enormous glut of steel, which will ultimately lead to mass layoffs from Pittsburgh to Beijing.
In 2007, China imposed duties of 5 to 10 percent on exports of more than 80 Chinese-made steel products, as well as other products containing steel, to trim its trade surplus. Under these circumstances, the Zhang National Steel Company would eventually have to cut its workforce—most of it recently hired—by two thirds. Such a move would displace many workers and their dependent families and could very likely lead to political unrest in the region, as elsewhere in China. In fact, China’s State Council, its cabinet, is starting to discourage investment in new steel mills by making such investments less attractive for investors. However, such efforts at the national level are countered by local officials whose goals are to increase local job opportunities and taxes. Locally, there is a strong push for establishing new steel mills, with local governments offering incentives for such investments.
Liu Hong gazed at the steel mill’s dock on the Yangtze River. Many of China’s steel mills are located on the banks of this river. River access facilitates barge access of ore imports, and the Yangtze is a magnet for competitors. The steel Zhang National produces is used primarily to meet domestic demand and feed the building boom in China’s large cities. Cement-and-steel structures line up the large avenues in Shanghai’s Pudong district, and along many of Beijing’s boulevards, massive structures line up against the hazy sky (see Figure 1-7).
FIGURE 1-7

Steel and cement dominate Beijing’s landscape.
However, even China’s economy appears to be slowing down, and after the 2008 Olympics, there is not as much incentive for the national government to push construction to showcase the new China to the world. The investors in the newly privatized Zhang National Steel Company are starting to ask questions about the viability of the company in the near future.
In spite of the recently imposed export duties on Chinese steel, Liu Hong believes that going international is the best strategy for the company. Investors need to understand the importance of going international to be profitable in the long term. Undoubtedly, going international will be a challenge in an environment that is fraught with unpredictability and protectionist measures. The world’s largest steel consumer, the United States, is an important target market in Liu Hong’s view, even though dozens of U.S. steel producers are going bankrupt because they cannot compete with imports that benefit from state subsidies. In an effort to protect the U.S. steel industry, the U.S. government took a step that challenged the entire world trade establishment, charging tariffs on steel imports. Furthermore, the European Union is contemplating measures to block a flood of steel imports from Asian countries—imports that normally would have had the United States as their destination. However, even though the United States and the European Union may raise some barriers to trade with China, Chinese steel will continue to remain more affordable than U.S. or European steel. Moreover, India’s steel consumption is rapidly increasing, and with large revenues from outsourcing, India has the hard currency to purchase this commodity to meet local demand.
Liu Hong realizes that he must present a balanced perspective on going international. The challenge is convincing the chairman and the investors that going international is essential for Zhang National Steel Company. As a first step, he examines the data on steel production in table 1-2 below.

Lascu, Dana-Nicoleta. International Marketing, 3e, 3rd Edition. Cengage Learning, 02/2008. VitalBook file.
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