Study on the Competitiveness and Efficiency of Chinas Iron and Steel Industry Based on a Three-Double-Model

He Weida
School of Economics and Management University of Science and Technology Beijing Beijing, China hewd@manage.ustb.edu.cn

Dong Huimin
School of Economics and Management University of Science and Technology Beijing Beijing, China igarfield123@sina.com

AbstractAccording to the strategic capability-based view, this paper frames a Three-Double-model for analyzing the competitiveness of Chinas Iron and Steel Industry. Sequentially, from national benefit and industry profit, backward and forward competitiveness, relative power and relative efficiency, this paper analyzes the competitiveness status quo and characteristic of Chinas Iron and Steel Industry. Finally, this paper suggests the policies for some important questions at the present time. Keywords-Three-Double-model; Chinas industry; Competitiveness; Efficiency Iron and steel

I.

THREE-DOUBLE-MODEL BASED ON THE STRATEGIC CAPABILITY- BASED VIEW

So far, most people definite industry competitiveness as the ability for one industry to make wealth. However, the distribution of wealth between countries has more and more important effect on international competition which the definition cannot reflect. As a result, this paper frames a ThreeDouble-model to describe industry competitiveness, in which the first double includes national welfare and industry profit these two purposes of industry competitiveness, the second one means forward and backward industry competitiveness these two formers, and the last double includes industry relative power and relative efficiency these two origins of competitiveness. From the view of one country, the improvement of industry competitiveness is reflected as the improvement of national welfare rather than the only increase of industry profit. So we should take these two purposes into consideration to balance the different strategic activity of enterprises and national. On the other hand, industry profit has relations with not only the products in forward but also the raw materials and resources in backward. And at last, relative power means the degree of one industrys control to key resources in global market and decides industrys bargaining power in international competition. Relative efficiency means industrys input-output ratio compared with foreign competitors. These two factors decide one industrys strategic capability. II. STUDY ON THE COMPETITIVENESS OF CHINAS IRON AND STEEL INDUSTRY

This paper compares the competitiveness of Chinas iron and steel industry with leading benchmarks, which choose the

main competitors in the world. Forward benchmarks choose major products exporting partners while backward benchmarks choose major resource importing countries. Forward benchmarks include domestic downstream firms and foreign partners because exporting products of iron and steel industry include not only direct steel exporting but also indirect iron& steel making products made by domestic companies. Relative benchmarks include foreign industry and large enterprises. Relative power mainly chooses industry concentration and enterprise scale while relative efficiency includes technical index, trade efficiency index and elements efficiency index. Limited by materials and the complexity of comparison, we mainly use qualitative analysis to analyze Chinas iron and steel industrys competitiveness. Table1 Comparing Items and Indexes of Chinas Iron and Steel Industry Competitiveness Composition of Benchmark Comparing Items Industry and Indexes Competitiveness 1.forward industry competitiveness (1)forward relative power compares with construction, industry forward industry automobile, concentration, machinery enterprise output manufacture, scale shipbuilding and household appliances industry compared with major steel industry foreign competitors producing concentration, countries like enterprise output U.S, Japan, the scale E.U. and South

(2)forward industry relative efficiency

Korea; international large iron and steel enterprises the same as above

(3)integration ability of forward industry competitivene ss factors 2 backward industry competitiveness (1) backward relative power compares with backward industry

major steel producing countries like U.S, Japan, the E.U. and South Korea

continuous casting ratio, price of products, sale income per capital, output per capital international investment, international investment ratio, strategic alliances of enterprises

compared with foreign competitors

(2)backward industry relative efficiency (3)integration ability of backward industry competitivene ss factors 3 integration ability of national strategy and enterprise

major iron ores exporting countries like Australia, Brazil and India; international large iron ores companies major iron ores importing countries like Japan, the E.U., and South Korea the same as above the same as above

industry concentration, enterprise output scale

industry concentration, enterprise output scale

major steel producing countries like US, Japan, the

average volume of blast furnace, large blast furnace ratio investment of international iron ores development, investment ratio, iron ores importing organizing degree national resource reserve condition, market growth degree, market

A. Forward Competitiveness of Chinas Iron and Steel Industry (1) Forward Industry Relative Power So far, building materials industry, machinery manufacture industry and automobile industry are main forward industries that boost Chinas iron and steel industry (GAO Tiemei, 2004). These industries can be divided into domestic demanding industry and international industry. Domestic demanding industries have decentralizing organization structure while international industries like automobile and shipbuilding have relatively higher industry centralization. The six largest car makers in the world have the global industry concentration higher than 70%. In 2007, CR10 of Chinas iron and steel industry reached 37.3% which has an advantage over domestic demanding industries but at a disadvantage compared with international industries. There was price inversion of steel products in 2008 which shows the gap of relative power between iron& steel industry and its forward industries. This gap may cause the outflow of industry profit and the loss of national welfare. The relative advantage over domestic demanding industries increases iron& steel industrys profit. However, the relative disadvantage from international industries limits the ability to transfer costs to foreign forward industries through lifting price. Compared with foreign competitors, industry concentration of Chinas iron& steel industry is quite lower. CR4 of Chinas iron& steel industry was lower than 20% in 2007 while major steel producing countries in world all have an oligopoly market, for CR4 of Brazil was 99%, South Korea was 88.3%, Japan was 73.2%, India was 67.7%, US was 62.1% and Russia was 69.2%. Arcelor Mittals output reached 116.4 million tons in 2007 which accounted for 10% of the global market. However, as Chinas biggest iron& steel enterprise, Baosteel had made only 28.6 million tons of crude steel in 2007, less than one-fifth of Arcelor Mittals output. The ten largest iron& steel companies in world have an average crude steel annual output about 28.6 million tons, 53.73% higher than that of Chinas five largest companies which is 23.6 million tons. Chinas iron& steel companies have a relatively small enterprise scale and weak power for international investment and market competition. Whats more, organization decentralization limits the formation of industry strategic power. (2) Forward Industry Relative Efficiency For technical indexes, continuous casting ratio of Chinas iron& steel industry reached 97.7% in 2007, almost the same

as that of developed countries. The introduction and diffusion of technique contribute a lot to quickly improvement of continuous casting ratio and show Chinas advantage of backwardness. For trade indexes, average exporting price of Chinas steel is 74% of that of Japan, 50.36% of Germany, 61.26% of Belgium& Luxembourg Alliance and 58.43% of France. This indicates that Chinas steel products are in a relatively low level and have a weak exporting profitability. In contrary, Chinas average steel importing price was 1230 dollars per ton in 2007, almost twice of exporting price and obviously higher than that of US($985/ton), South Korea($724/ton) and Belgium& Luxembourg Alliance($876/ton). This shows that Chinas iron& steel industry only has the low cost and low price advantage in international competition while for high-tech and high additional value products it even cannot meet domestic needs. This also suggests the lack of technology innovation for Chinas iron& steel industry. For elements efficiency, the per capital output of Nucor Corp, Nippon Steel, Pohang Iron and Steel Co.(POSCO) was almost ten times of that of Chinas large and middle iron& steel enterprises in 2006 and per capital sales income was 12.68 times of that of China. We can see that compared with foreign competitors, Chinas large and middle iron& steel enterprises are more behind in per capital sales income. This indicates that Chinese iron& steel industry have lower products and market efficiency. (3) Integration of Forward Industry Competitiveness Factors The integration with forward industries also shows that Chinas iron& steel industrys weakness in forward power. Because of the various kinds and high profession of steel products, it has been a tendency for iron& steel industry to build long-term cooperation with its forward customers. Major international iron& steel companies have already built longterm alliance with some forward industries like automobile and shipbuilding while China started relatively later in this part and most Chinese steel products were indirectly exported. Thus China lacks the competence in high level market. For the integration of national strategy and enterprise strategy, the protection of domestic market may not only meet resistance from foreign competitors but also weaken domestic competition and prevent industry innovation. More importantly, subsidies for exporting products will easily draw anti-dumping or countervailing suits from foreign countries. So government intervention has limited help to the integration of national and enterprise strategy.

B. Backward Competitiveness of Chinas Iron and Steel Industry The backward competitiveness of Chinas iron& steel industry mainly means the import of iron ores. (1) Backward Industry Relative Power First of all, compared with that of international iron ores suppliers, Chinese iron& steel industrys concentration is much lower. CVRD(Companhia Vale do Rio Doce), BHP Billiton(Broken Hill Proprietary Billiton) and Rio Tinto Group take up about 70%-75% of global market and have already formed the oligopoly structure while Chinas iron& steel industrys concentration is quite low and importing is decentralized. Though China imported 46% of global iron ores in 2007, it still couldnt have the bargaining power. Secondly, origin countries of Chinas importing iron ores are highly centralized. In 2007, China imported 32.26 thousands tons of iron ores from Australia, Brazil and India three countries, accounting for 84.21% of whole years import volume. This made the import of iron ores easily controlled by exporting countries. Lastly, compared with major iron ores competitors like EU, Japan and South Korea, China usually meets price discrimination from suppliers because of the low industry concentration and importing decentralization. For example, price of pellet that was demanded by EU rose a little in 2006 while lump ores and ore fines which were heavily demanded by China had a large rise scale. (2) Backward Industry Relative Efficiency The maximization of blast furnace means a lot for improving iron ores using efficiency. There are a huge number of small blast furnaces whose volume is less than 300 cubic meter in China though large steel enterprises are speeding the maximization of blast furnace. This not only reduces the using efficiency of iron ores but also increases the consumption of energy and water resource and environment pollution. Moreover, too many small blast furnaces allow the existence of lots of small steel companies which finally results in the low industry concentration. (3) Integration of Backward Industry Competitiveness Factors The cyclical fluctuation of iron& steel industry affects the stability of demand and supply of iron ores and both buyers and sellers of ores pursue the stability of price. This paves the way for the strategic cooperation of both parts. So far, Japan, South Korea and EU have all strengthened their cooperation with iron ores suppliers and already formed some joint ventures. However, China apparently lacks the control of iron ores investment and usually meets converging attack from suppliers and other iron ores buyers. China has the ability and

possibility to form strategic alliance with iron ores suppliers over the long term but the scale of Chinese steel enterprises are relatively small, which limits their foreign investments. On the other hand, corporate system will affect the long term cooperation and most Chinese steel enterprises are stateowned which will virtually impair the integration with ores suppliers. III. CONCLUSIONS AND SUGGESTIONS

A. Conclusions (1) Compared with foreign competitors and their forward industries, for forward industry competitiveness, Chinas iron& steel industry has advantages on whole industry scale and domestic demand but is at a disadvantage on whole industry power and industry efficiency, especially the industry relative efficiency. For national welfare, there are many hidden troubles. On the one hand, relative power and relative efficiency of high additional value products are too weak and low to explore international high level market and transfer costs to foreign forward industries. On the other hand, export of low end products increased greatly these years but at the cost of low wage rate, excessive consumption of energy and environment pollution. This kind of competitiveness lacks sustainability and is harmful to national welfare. Reasons of weak forward industry relative power include low industry concentration and more importantly, the insufficiency of specialization division. Whats more, lack of large international companies limits Chinas iron& steel industrys international integration. (2) Low backward relative power and efficiency together result in weak backward competitiveness. Weak industry backward relative power makes China lose the bargaining power of importing resources. High ores price results in huge profits being transferred to aboard and causes the lost of national welfare. For low backward relative efficiency, on the one hand it increases the consumption of domestic energy. On the other hand, the existence of many small steel companies intensifies the competition on importing iron ores and furtherly reduces backward competitiveness. Weak industry backward power mainly shows as low industry concentration and decentralization in ores import while low backward efficiency mainly shows as too many small blast furnaces. In the whole, China should focus on the management of small blast furnaces in order to improve backward efficiency and industry concentration.

B. Suggestions China should take all the three doubles into consideration to improve the competitiveness of iron& steel industry. For industry profit and national welfare these two industry purposes, China should highlight the latter to improve iron& steel industrys competitiveness. When evaluating industrys profit, society costs should be included and cut off. Meanwhile, China should pay attention to the improvement of costs to develop green and saving iron and steel. For industry competitiveness directions, China should emphasize the cultivation of backward competitiveness. Great demand from domestic market decides the urgency to control resource costs by improving backward competitiveness. At the same time, Chinas iron& steel industry still needs to improve its forward competitiveness by raising the technology and quality level to win the international competition. For competitiveness origins, China should underline the improvement of relative power to break the monopoly in global market and increase its bargaining power in international trade. There are several ways to improve iron& steel industrys relative power like improving industry concentration to form the oligopoly structure; improving industry organizing for resource import and developing large enterprise groups to enhance enterprises international operation and resource investment. REFERENCES
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