The Hottest Thing In Cold Steel

Can Baoshan remain China's steelmaking champ?

Success has its price. Just ask Li Ming, 69, the spirited chairman of Shanghai-based Baoshan Iron & Steel Corp. While perhaps half of China's state-owned enterprises are bleeding red ink, Baoshan boasts an efficient workforce and management, and sales of $2.85 billion. And that's exactly why the Shanghai municipal government now wants Baoshan to take charge of three money-losing steel plants that employ 130,000 workers. Li, whose lean staff of 10,500 employees produces more steel than the other three plants combined, isn't interested. "If these companies are merged," he says, Baoshan's "economic efficiency" surely would suffer.

Li's focused strategy has helped make Baoshan China's most modern and competitive steelmaker. An engineer by training, Li began paring the huge conglomerate into subsidiaries in 1988, three years after the plant started production. Years before China began deregulating its state-owned steel industry, Li downsized Baoshan's workforce and shed unprofitable sidelines. The company outsourced the traditional "iron rice bowl" burden of providing schools and health care for employees, contracting out these responsibilities to local governments. Baoshan also invested heavily in upgrading technology, buying the latest machinery from Japan and Germany. "Baoshan is simply the best in China," says a Hong Kong-based steel trader who deals with the company. "They have the most advanced technology, they're progressive in their business dealings, and they're profitable."

Now, with Shanghai's economy in particular clocking 14% annual growth, Baoshan is in the right place at the right time. China's steel consumption has grown 11% annually for the last four years owing to the rapid pace of construction, and such demand is likely to continue over the next decade. "Baoshan can become one of the world's top manufacturers, because China will be the most important market in the world for some time to come," says Ann Zhang, senior steel analyst at ABN-AMRO Hoare Govett Investment Consultancy in Taiwan.

Among the company's clients is China's most profitable auto maker, Shanghai Volkswagen Automotive Co., a joint venture between Volks-wagen and the Shanghai Automotive Industry Corp. Seven years ago, the joint venture imported all its steel. Baoshan now has become Volkswagen's principle supplier and will provide it with 130,000 tons of steel for 250,000 cars this year. Baoshan won the contract in part because of its proximity to the plant. But more important, the steelmaker is the only reliable domestic producer of the thick, cold-rolled sheets needed by the auto maker. Says Tang Linggen, Shanghai Volkswagen's supply manager: "Baoshan provides the quality we require."

Baoshan's Li also has targeted China's domestic shipping market, producing high-end weatherproofing for container manufacturers. Through competitive pricing, the company has wrested significant market share from South Korea's Pohang Iron & Steel Corp. and Japan's New Nippon Steel--companies which just three years ago monopolized the Chinese market in steel for container manufacturing.

GLOBAL RIVALS. Even with its unbridled success, China's premier steel manufacturer cannot risk complacency. With steelmakers from Russia and Central Asia also competing in China's markets, Baoshan must keep improving product quality. And it must keep adding new technology to keep its exports on par with global rivals, particularly Japanese and Korean. Says Chairman Li: "We have reached a level of international stature, but that cannot last long if we don't develop our own technology and competitiveness." Baoshan now exports some 30% of its steel to the U.S., Europe, and Japan. "Exporting consistently has helped Baoshan meet world market standards," says Jason Cheung, research analyst at UBS Securities in Hong Kong.

In addition, Baoshan has embarked on an ambitious, $7.5 billion expansion plan that would lift output by 50%, to 11 million tons a year, placing it among the world's top 10 producers in terms of capacity. But despite the promising numbers, Baoshan's management decisions are still ultimately made by the Chinese government. And if the government forces Baoshan to take on the weight of three less-profitable mills, Li will have to prove he is indeed a man of steel.

Before it's here, it's on the Bloomberg Terminal.