On August 20, Capital Steel Co., Ltd. (Capital Steel) announced that it would invest all the shares it holds in Beijing Automobile Investment (BAI) plus some fund for 18.31 percent equity stake in the planned Beijing Automobile Co., Ltd. to become the new company’s second biggest shareholder.
The Chinese steel industry, facing rising costs due to an international iron ore monopoly, has seen hard times in recent years. According to the China Iron and Steel Association, the domestic iron industry saw a profit ratio of only 2.43 percent in 2009, while the average profit ratio of all industries in China was 5.47 percent.
In contrast, automotive suppliers in China enjoyed a profit margin of 8-10 percent last year, two times the global average, according to AlixPartners.
More players jump into the industry
Earlier in June, the shock absorber factory of Beijing West Industries, a subsidiary of Capital Steel, was formally established. The plant will provide shock absorbers to Chinese automakers such as Chery and Beiqi-Foton, and to high-end car manufacturers such as BMW, Audi and Benz as well.
According to Zhu Jimin, chairman of Capital Steel Group, parent company of Capital Steel, the company will cease its steel production in Beijing at the end of this year, making auto parts production its mainstay business in the future. In fact, Capital Steel’s earlier acquisition of BAI has shown such determination for the auto industry. The Chinese steel tycoon has earned an initial success by becoming the supplier of Beijing-Hyundai, Beijing Benz-DaimlerChrysler, Beiqi-Foton and Beijing Automotive Works.
Early in 2007, Shanghai Baosteel Group Corp. stepped into the auto industry and successfully reeled in BYD and Guangzhou Automobile Group as its long-term customers.
Wuhan Iron and Steel Plant jointly established an auto parts production base with Chery in July to produce auto stamping parts. The Nanchang Iron-Steel Company has also made it a goal to become an auto parts manufacturer, in addition to emerging as the largest spring flat steel production base in the world.
A likely win-win deal
Some industry analysts believe that the expansion of steel makers into the auto industry will benefit both sides. Take the cooperation between Capital Steel and Beiqi-Foton as an example.
Capital Steel signed a steel and vehicle reciprocal procurement agreement with Beiqi-Foton in 2009. Based on the agreement, under equivalent conditions, the two parties will give preference to the products of the opposite party when conducting purchases. According to Jia Xinguang, a senior industry analyst, on the one hand, the deal has facilitated Capital Steel to extend its business into the auto industry; on the other hand, through cooperation, Beiqi-Foton is able to lower its costs and gain qualified auto parts.
China’s production capacity of high-end car panels is far less sufficient, and most of the panels are imported. By processing their self-sufficient high-class steel into auto parts, China’s steel makers will be able to not only keep up with sustainable development, but also realize their industrial transformation.
According to China Association of Automobile Manufacturers, 80 percent of auto parts manufacturers in China are local enterprises, amounting to a total of 20,000 firms. However, total sales of all local enterprises account for only 20 percent of industry numbers in China, with 90 percent of those sales low-end products. Now, the entry of steel tycoons into the market might help further vitalize China’s auto parts industry.
Rewritten by Jennifer Chen based on author’s article on
Zhongguo Jingji Xinwen Wang or China Economic News