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Globalization: Opportunities and Challenges

Competition and Cooperation - Head For China's entry to WTO Gear into Global Economy
Xu Daquan - Chairman of Shanghai Baosteel Group Corporation

Nanjing, China - 17 September 2001


Distinguished Chairman,
Ladies and Gentlemen:

Good afternoon! I am honored to be invited to attend the Sixth World Chinese Entrepreneurs' Convention and have this opportunity to discuss the topic "Globalized Economy: Opportunity and Challenge" with you.

The development of competition and cooperation inevitably leads to globalized economy. From unilateral and multilateral trade to applying for entry to WTO, our country is aiming at adapting to the trend of globalized economy, participating in international competition and gearing into the main stream of world economy.

Although trading and investment liberalization are manifested as policy-oriented or multilateral trade between governments, they are promoted by the enterprises, as well as the globalized economy. Enterprises, especially the transnational corporates, are the major part of globalized economy, and determine the features of world economy competition, which appears as follows:

First, with the background of globalized economy, the competition between countries presents as that between transnational companies to some extent. A country would be at a disadvantage in the globalized economy tide if it does not have transnational companies with international competitiveness.

Secondly, the competition between transnational companies has intensified the centralization of industry. The technical route and developing prospect of one industry are decided by several large-scale enterprises.

Thirdly, when the market has been centralized to a certain extent, the cooperation between large companies of equivalent strength will become necessary for development. Strategic alliance between enterprises has grown rapidly as an important form in recent years.

Let us look at the downstream industries of steel industry, e.g. automobile, several automobile industry magnates have formed globalized system of production, research, development and sales and decided the tendency of world automobile industry by direct investment and capital operation globally. In the upstream of steel industry, such as mining, the international production and sales system has been shaped through internationalized investment resource and sales. Let's come back to steel industry. Nippon Steel, Posco and Usinor, etc, have formed international labor division and production system from mining ¡§C metallurgy ¡§C rolling ¡§C deep processing by international labor division of steel industry chain; on the other hand, they have completed global arrangement of operation strategy through capital export, technology transfer, merger and reorganization worldwide. More important, through mutual cooperation, these large enterprises have possessed ability of bi-directional resource controlling, such as joint procurement of iron ore, jointly developing downstream products and the third party market, which can lower cost, develop market and increase the barrier for entering the market; thus it is more difficult for those domestic steel companies to enter the world market.

Under such complicated global competition, the domestic enterprises shall correctly recognize the opportunities and challenges coming along with the entry to WTO. Analyzing from an overall and long-term perspective, the entry to WTO means more opportunities to participate in the international division and cooperation; more direct import; more chances to refer to and learn international advanced technology, operation concept and management; to acquire latest management view and develop concept and more space for enterprise to participate in the international competition on broader and higher level. However, the challenges come along with the opportunities. After the entry to WTO, China will fulfill bilateral and multilateral trade agreement gradually and finally within 5 years' interim, expand market admittance, lower tariff level and eliminate non-tariff barrier. The products, technology, management, service and capital of transnational companies will be imported to China easily. The domestic companies will be confronted with severe challenges when competing with world's large companies in the same field.

After more than 20 years' reform and opening, the domestic competition has already been internationalized. Domestic steel enterprises strongly feel the global competition pressure, which will be definitely strengthened with the accession to WTO. Due to the global surplus production capability, the competition between steel enterprises is decided by the comprehensive competitiveness in the global market instead of product variety, quality and price. Unless the domestic steel enterprises make dramatic adjustment and reform on their development strategies, technology innovation, management and service, probably the product structure of China steel enterprises will incline to be of low level and industry structure to be of marginal.

Facing the challenges of globalized economy and competition from transnational companies, the industry circle has realized that domestic enterprises must reconsider their development strategies from the perspective of global competition; learn the methods and measures of resource allocation globally; adapt to the new environment and rules as soon as possible by fully using the interim arranged by WTO; accelerate the innovation of idea, system, technology and management to enhance the core competition ability; carry out inner industry merger and capital reorganization according to the requirement of industry organization and scale economy in order to set up conglomerate with competitiveness; all of the above has become the mutual understanding of industry circle. Hereon, I would like to point out that in order to adapt to the new features of global competition, we must strengthen the collaboration mind, cooperate actively with customers, suppliers, domestic and foreign companies of the same trade in various levels and ways to enhance the enterprises competitiveness; at the same time, actively implement international operation and strive to establish large-scale transnational company with international competitiveness.

Along with the development of globalized economy and deepened international division, on the base of conventional supply chain and customer relation management, it has become a trend for transnational companies to set up partnership or strategic alliance with its competitors. In recent years, some steel enterprises have walked the road of cooperation, which is manifested on three levels. First, jointly develop technologies to lower the risk and cost of technology development by single company, for instance, jointly research and develop new steel material against the competition of substitute material. The project of light auto sheet "IISI automobile new type project" carried out by members of the International Iron and Steel Institute is good example. Secondly, the merger and acquisition among global steel enterprises are progressively increasing. For instance, the merger between Thyssen and Krup in 1997, the establishment of  Corus group in 1999 after the merger of British Steel and Hoogoven, and the latest merger at the beginning of this year of three large European steel companies ¡§C Usinor, Abed and Arcirrila, announcing to establish a new company, which will become the largest steel enterprise in the world. Through alliance between strong companies and advantage complementation, the competitiveness of enterprises is strengthened. Thirdly, strategic alliance has become a new cooperation mode. Usinor set up an alliance with Nippon Steel; Nippon Steel and Posco have exchanged their equities; China Steel is also expecting to cross-exchange equity with Japanese and Korean steel enterprises. Certainly, we should never only focus on the form of cooperation; what is more important is the real substance. Substantial opposing with the form of cooperation will not work. With the rapid growth of China's economy, Chinese market has become a hot spot globally. China is more and more open and we welcome all of you to China. Some enterprises moved from countries where labor cost is more expensive than China in order to occupy the market with price lower than cost, they would probably suffer from the bad consequences.

To avoid cutthroat competition, domestic enterprises shall not only cooperate with each other, but also make use of its own competitive advantages and collaborate with international enterprises to enhance the ability of technology, management and market competition. Comparing with the world industry magnates, we still need to catch up in the aspects of technology, management and marketing. As long as we can position ourselves correctly in the whole industry value chain and cultivate our core competition ability, we should be able to effectively compete and cooperate with foreign magnates. At the beginning of this year, Baosteel has signed letter of intend of strategic cooperation with Capital Steel and Wuhan Steel, and started material cooperation in the field of scrap steel procurement, which is considered as the strategic countermove of these three domestic steel enterprises to China's entry to WTO and worldwide competition. In future, following the principle of advantage complementation and mutual benefit, Baosteel will develop cooperation with outstanding domestic and foreign enterprises in the fields of research, development, trade, logistic, investment and financing.

The competition and cooperation between foreign companies and us are not limited in domestic market. We shall go out and seek for cooperation partners globally and compete in the world market. International operation is our active pursuit heading for challenges of globalization and gearing into world economy. The original meaning of globalization is optimizing resources allocation worldwide. Only after entering the international market, subdivision of global market and optimizing resources allocation, the international competition can be enhanced and more development space can be obtained. The strength contest between transnational companies depends more on the capability of global resources allocation without restricting to certain products or markets. Those enterprises of Fortune 500 have been consistently seeking for global strategy of realizing the lowest production cost and highest sale price worldwide; and increasing market occupancy and global profit as much as possible. Usinor group has shaped a development strategy of "based in Europe, expand outwards effectively", including overall investment operation in Latin America, North America and East Europe in order to set up a global operation network. After the Asian economy crisis, Posco has localized the high value added production and has been able to export to the third country through building up steel deep processing line in its target market in the form of joint venture. Recently, Posco intends to invest in coal mining in China to stabilize fuel supply and lower procurement cost. Domestic enterprises shall learn how to utilize resources globally and actively carry out international operation. In the past, the major objective of domestic enterprises was export and making profit in foreign currency. They should convert their focus from product export to global operation, which is regarded as the strategic target.

It is an inevitable choice for Chinese enterprises, especially large state-owned enterprises, to actively carry out international operation and establish large conglomerate of international competitiveness, which is also Baosteel's developing direction. For the moment, generally speaking, the international operation of domestic enterprises is only at the stage of product export, while some outstanding ones have started exploring international operation. The developing objective of Shanghai Baosteel Group Corporation is to build Baosteel into a transindustry, transownership, transregional and transnational conglomerate with mainline in steel production and sidelines in industry, trade and finance in the next 5 to 10 years in order to become the World's Top 500 enterprises. For this purpose, we must actively carry out international operation, which is also the approach to enhance international competitiveness. Presently, Baosteel's international operation is in the initial stage, which is only limited to international trade and agency for steel and related products. There is still a gap between the advanced international steel makers and Baosteel in terms of the proportion of overseas sales income. However, Baosteel is undertaking a transnational investment trial. At the beginning of this year, Baosteel has started negotiating with overseas mining companies regarding the joint exploration of iron ore. Hereafter, on the basis of current international trading network, Baosteel will energetically explore and make use of its advantage on equipment and technology to carry out international technology trade, and gradually expand its industry investment at the same time. Baosteel was successfully listed in the domestic A share market. Taking this as turning point, we will implement capital operation in domestic and foreign capital market by comprehensive utilization of equity, bond and project financing, etc, and accelerate Baosteel share to be listed in overseas stock market in order to provide more space for international development.

Ladies and Gentlemen, facing the trend of globalized economy and the competition structure of world economy, Chinese enterprises are trying to enhance its core competitiveness and actively involved in international competition with an open attitude. Meanwhile, we are willing to cooperate with domestic and foreign companies in the same industry, suppliers and customers to seek a win-win situation.

Harmony is the most valuable asset. The Chinese Nation is a nation which stresses a lot on good cooperation and we are good at cooperating with each other. Family-base and relations values in the Chinese national tradition are the cultural origin of cooperation. This convention has undoubtedly brought us a chance to cooperate and communicate with each other. Let's cooperate and seek further development together.

Thanks!


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