Energy & Resources

Seeing the light

Why Tangsteel is moving away from its core business

CHINA-STEEL/REFORM

Let’s make light bulbs instead

It’s official – steel is China’s least profitable industry. In the first half of the year, the average profit margin at members of the China Iron and Steel Association was a wafer thin 0.13%, reports Xinhua. The sector suffered a Rmb699 million ($113 million) loss in June alone.

No wonder steel companies are looking for opportunities outside their core business, which continues to struggle with excess capacity after years of giddy overexpansion.

Previously, steel giant Wuhan Iron and Steel has opted for pig farming (see WiC142), while Shougang has even dabbled in winemaking. Tangshan Iron and Steel Group Corporation is no different in wanting to try out a few business alternatives.

In less than three years, Tangsteel has opened more than 20 subsidiaries outside of the steel sector, including real estate, liquefied natural gas and an educational business, reports the Economic Observer.

“We must find a new way out,” Tangsteel’s Party secretary and deputy general manager Wang Xindong told the newspaper.

Tangsteel’s short-term goal is for its non-steel businesses to bring in revenues worth Rmb13 billion ($2.12 billion), with the hope that more than half of Tangsteel’s income will come from businesses outside of steel by 2015, reports the Economic Observer.

In the long-term, it wants these businesses to operate at a profit margin of at least 12%, something unimaginable in the current commercial environment for steel.

Hence another foray into a new business area, although this time the venture is LED lighting, which Tangsteel is developing in cooperation with a Korean partner.

Samsung or LG, you might think? Not so: Tangsteel’s collaborator is a subsidiary of South Korean steel giant, Posco Group, and brings to the venture its core LED technology.

In June, the two companies signed a cooperation agreement and Tangsteel’s targets for the new venture are ambitious. Within two years, it wants to take a 5% market share in China, and within five years increase that to 30%.

In doing so, it hopes to capitalise on policy directives seeking to switch Chinese homes and offices from traditional light bulbs to more environmentally-friendly LED lights. The government’s target is 30% of homes using the newer lights by 2015, which would create demand worth Rmb500 billion (see WiC157).

But getting a large chunk of this market could also prove problematic, as LED lighting is suffering from overcapacity itself. The industry started in Shenzhen with local government support but spread across the country as other cities started to build LED hubs. This has hit profits. Last year, 25 listed LED firms reported net income down 18% on 2011, reports CBN.

One official even told Southern Metropolis Daily that the government is worried that LED could become another solar industry, which is now suffering comparison with steel as one of China’s most swollen sectors. If so, Tangsteel can expect criticism for moving from one overextended industry to another.

Of course, the diversification strategy leaves many questions unanswered, not least why Tangsteel thinks it can become competitive in many of the new business areas that it’s chosen to enter. Cost saving doesn’t seem top of the agenda either. The company says its workforce is being rearranged rather than reduced, with 22,000 of its 37,000 employees to be transferred to its new subsidiaries. According to newspaper reports, Tangsteel has even made a commitment to take staff back to their former roles should any of the new subsidiaries fail.

In the meantime, Tangsteel is hoping that diversification will reinvigorate its original business too, with the 15,000 people still focused on the steel business helping its employee productivity get more in line with internationally competitive firms.


© ChinTell Ltd. All rights reserved.

Exclusively sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.