A Strategic Analysis on Baosteel’s Internationalization Process

徐運周(Yunzhou+Xu)

（Southeast University- Monash University Joint Graduate School， Suzhou， Jiangsu， 215123）

Abstract： This article briefly analyzes the internationalization process of Baosteel Group Co.， Ltd.. After an introduction， international market targeting and market entry processes are analyzed based on Porters Diamond Model and Uppsala Model， respectively. The overseas expansion offers Baosteel great opportunities as well as challenges from both external and internal environment， which are discussed later. And finally three suggestions are provided for Baosteels further development.

Keywords： Baosteel； internationalization； strategy

Established in 1978， Baosteel （stands for Baosteel Group Co.， Ltd.） took advantage of political preference and won opportunity of prior development among Chinese companies. Baosteel is now the most competitive comprehensive steel group in China， ranked 275th among Fortune 500 in 2016. Its products are exported to more than 40 countries and regions in Asia， North and South America， Europe and Africa.

Baosteels internationalization process

The globalization process of Baosteel started from Sep. 1985 when it authorized Sinochem Group as its export agent. Afterwards， it successively set up subsidiaries and joint ventures overseas include Baohe （1993 in Tokyo）， Baoou （1993 in Hamburg） and Baomei （1996 in Huston） to deal with regional import and export. Some （e.g. Baomei） took a further step to develop potential overseas market and establish strategic companionship with famous brands such as GE. In 2003， Baosteel established the department of overseas business which specialized in planning and coordinating overseas operations. The overseas bodies of Baosteel gradually turned from mere sales agencies to integrated entities.

To solve the problem of excessive capacity and raw material price increase， Baosteel started strategic resource allocation by investing in overseas exploitation. In 2001， Baosteel and Vale， reached agreement on strategic alliance. Baosteel then established Bao-Aus with Harmersley， the second largest Australian iron ore， and successfully controlled 10 more million tons of iron ore production per year. In 2004， Baosteel， Arcelor （a large European manufacturer）， and Volkswagen Shanghai reached a framework of concerted production. The three parties invested more than 2.5 billion dollars in establishing factories of 3.7 million tons of capacity. In 2007， Baosteel set up a joint investment and consultant firm， Gangqilian， with Wuhan Steel and Ansteel， aimed at restructure the overseas investment of Chinese enterprises in ore exploitation.

Along with its globalization process， Baosteel Group is diversifying its business area. The group now includes 4 sections. The steel and iron section remains the core. The service section keeps on expanding， consists of logistics， e-commerce， software， engineering， etc. The finance section， issued convertible bonds in 2008 and offshore RMB bonds in 2011， is also growing rapidly. Finally， real estate section， as a supplement， devotes itself in utilizing spare lands. Meanwhile， social obligation is another important attention for Baosteel. 100 million exclusive funds are appropriated each year to reward high-achieving students， scholars， and engineers. Eco-friendly ideas are embedded into operation and management. These enhance Baosteels image of a responsible industrial leader.

Market Targeting

The Porters Diamond Model indicates that the success in international trade comes from the interaction of four aspects namely， production factors， demand and supply， related and supporting industry， firm strategy and rivalry （M Porter， 1990）. It seems quite applicable in the case of Baosteel.

Firstly， Baosteel selected markets with abundant factors and supporting industry as its target. Gaining access to high quality factors by low cost is the foundation of success. So it set up all its early branches in places with developed manufacture and transportation. Huston is the petrochemical as well as transportation center of America. Hamburg is the trade center and largest seaport in Germany with advanced shipbuilding， machinery and metallurgy. Tokyo， the capital of Japan， in which almost all famous Japanese brand can be found.

Secondly， Baosteel sought for better demand-supply condition. Excessive capacity has long been a problem in china， results in the mismatch of domestic demand and supply. Since 90s， the Chinese government has strongly encouraged local companies to “go out” to seek the rebalance of demand and supply. China owns a large quantity of iron ore while highly-industrialized cities such as Hamburg， Tokyo and Huston have a large demand of raw material thus makes them favorable target for Baosteels export， not yet mentioning the lenient investment climate.

Market Entry

After finding the proper target market， the selection of entry mode lies ahead. According to Uppsala Model （Johanson and Vahlne， 1975）， a companys international market entry process can be distinguished into 4 stages： no export， export via independent agents， overseas sales subsidiaries， and overseas production units.

Baosteels foreign entry process can be summarized accordingly. The first stage， before 1985， has no direct foreign interaction. Baosteel did very limit sales and purchase in foreign country through government agency. In the second stage， 1985 to around 2000， it traded （mainly export） through branches. Served as independent trade agency at the beginning， overseas branches effectively promoted the brand of Baosteel. Meanwhile， they cooperated with local companies and prepared for a full supply chain. The boundary between second and third stage is a little vague. Since 2003， Baosteel began systematically managing and coordinating overseas branches by an independent department. Many of the branches had already possessed the function of marketing， sales and services. A landmark event of the fourth stage is the cooperation of Baosteel with Arcelor and Volkswagen. By far， Baosteel further integrated the different function of its overseas business and triggered greater capability.

Baosteels step-by-step entry leads to favorable outcomes. By export and contractual exploitation， Baosteel established friendly relationship with local partners and popularity among local society. It also acquired knowledge for cross border operation and management. Meanwhile， its a far less risky than many of the more direct entry mode such as acquisition because theres much time to watch and adjust， especially when adverse economic， political or legal conditions appear.

Opportunities and Challenges

Baosteels market targeting and entry offered it great opportunities for learning and developing. New accessible markets absorb Baosteels excessive capacity. Better source of raw material enables Baosteel to improve its production quality. Baosteels foreign expansion has brought it a wide， diversified business network. Without going global， Baosteel is far less likely to set foot in so many business areas， say， finance. In 2014， a Cooperative Memorandum of Understandings was signed by Baosteel， Aurizon， China Development Bank and ANZ Bank. It shows that both China and Australia have great confidence in the cooperative iron ore exploitation and construction project.

Baosteel gradually won approval and fame and reputation in foreign markets. It was the world fourth largest steel company in total yield according to Steel Business Briefing （SBB） 2012. Standard and Poor upgraded Baosteel to BBB+， and later to A， which attracted an increasing number of investors. In the International Warsaw Invention Show 2011， Baosteel won 7 gold medals out of its 8 exhibits. Baosteel was invited to attend in a variety of global activities such as European Steel Environmental & Energy Congress to addressed keynote speech.

Overseas expansion inevitably results in larger risk exposure. External risk includes global commodity price volatility， exchange rate risk， and political uncertainty. For example， in the past 5 years， commodity prices for iron is keep dropping， influencing the whole business climate. The status of main global currencies is changing， cause higher expenses for hedge. From internal side， Partners and employees with more complex background make credit management and HR management of the company tougher.

Suggestions

The overseas expansion of Baosteel offers the company great opportunities as well as challenges from external and internal environment. To keep pace with time， 3 suggestions are provided. Firstly， as a traditional steel firm， Baosteel should enhance its main business by technology improvement. Steelmaking and steel-related manufacture should always be its core competitiveness. Secondly， as trade and finance liberalization goes， the diversity and volatility of global market will keep increasing. Baosteel should deepen the relationship with its foreign partners. Thirdly， the institutional benefit enjoyed by Baosteel will tend to disappear as Chinas market-oriented economy reform complete. Baosteel have to accelerate its pace of restructure to adapt to fiercer competition from both domestic and foreign manufacture industry.

References：

[1]Baosteel has acted as a practitioner in the great path of reform and open up since 1978.

[2]Its a state-owned enterprise in the businesses of energy， agriculture， and chemicals.

[3]Its one of the worlds three iron ore magnates.

[4]Another two largest Chinese state-owned steel group in Wuhan and Anhui Province respectively.

[5]See Furman， J.， Porter， M.， S， Stern. （2002）. The determinants of national innovative capacity. Research Policy 31（6）：899-933.

[6]China owns more than 45 billion tons of iron ore reserves， but the average quality of which is low （rich ore only occupies 2.8% of the total）.