Read the following case study and then answer Questions 1 – 5 which follow:
The internationalization of a leading Chinese steelmaker, and management of its European headquarters in Germany.
The Making of a Global Corporation
The name “Baosteel” combines Baoshan, a district in Shanghai, China, and the English word “steel.” “Baosteel” stands for a Chinese company with global outreach. However, experts on Asia think that there is an additional twist at play, as is often the case with company names in this region. In Chinese “bao” also signifies “valuable” or “precious,” and a literal translation of Baosteel may be “premium steel”—certainly something to which the company aspires.
Baosteel’s home market is staggering. On the demand side, the market reflects the sheer and insatiable needs of the largest and most successful emerging economy in the world. However, on the supply side, it is fragmented unlike any other market in the world. Currently, the Chinese steel market is divided by 260 steelmakers of various sizes, and some sources say this number could be greater than 1,000. While some of these firms are profitable, most are not. Thus, it is not surprising that the Chinese government is urging them to turn themselves into large steelmaking corporations following the lead of Baosteel.
The Baosteel Group was founded in Shanghai in December 1978 under the name of Baoshan Iron and Steel Complex. Skipping some of the historical details, it is sufficient to say that the current-day corporation is the result of a large merger between Shanghai Metallurgical Holding Group Corporation and Shanghai Meishan Group Co., Ltd. carried out in 1998 on the basis of a government decree. With continued growth, the most recent acquisition took place in April 2008, when Baosteel acquired the Bayi Steel Group in the province of Xinjiang.
Baosteel Group is a holding company consisting of five divisions:
2. Steel trading
3. Equipment and spare parts engineering
4. Steel products
5. Shanghai headquarters office (administrative and service)
The company produces and sells steel primarily to carmakers, shipbuilders, electronics and household appliances makers, oil drilling and pipeline companies, and construction companies. Baosteel has further diversified into areas such as financial services, trading, and logistics services. In sum, the company’s operational philosophy is to continue to “diversify trading functions and operation products” while “gradually expanding non-Baosteel trading business.”
In comparison to international rivals, Baosteel displays a high degree of diversification. However, this is typical for many large Asian firms. Baosteel is a wholly owned state-owned enterprise (SOE). The largest business unit, Baoshan Iron and Steel Co., Ltd. (Baosteel Co., Ltd.), has been listed on the Shanghai Stock Exchange since 2000. Currently 78% of the shares are held by Baosteel Group, and thus ultimately by the Chinese government.
In recent years, the turnover of Baosteel has risen annually by 10%, from $19.5 billion in 2004 to $26.3 billion in 2007. During the same period, steel production has risen from 21.4 million to 28.6 million tons. Baosteel, which currently employs 122,780 workers, is China’s largest producer of steel. It has worked on prestigious and complex building projects such as the principal venue of the 2008 Summer Olympic Games (the national stadium nicknamed “Bird’s Nest” in Beijing), the headquarters of CCTV state television in Beijing, and the terminals of international airports in Beijing and Shanghai. In international terms the company is also one of the largest corporations of its kind. Since 2006, Baosteel has been in fifth place in the global steelmaker category. In 2004, Baosteel was the first Chinese manufacturing company to be included in the Fortune 500 list at 372—by 2008 it had climbed to 259. Baosteel aims to become one of the three largest steel producers in the world as soon as possible, and is well on its way to achieving this goal.
Strategic Positioning and Global Activities
Many experts believe that Baosteel’s goal is attainable. Its accomplishments, which the Western media traditionally would not have thought possible in the case of a Chinese SOE, speak for themselves. Over the course of the most recent merger, the workforce was cut 43% from 176,000 to 122,780. Baosteel believes that its future success is no longer going to be based on cheap labour, but instead on automated production. The main plant in Shanghai is considered to be one of the most modern and most efficient manufacturing sites for steel products in the world. At Baosteel, the new management focus is visible in many areas. For example, the “Six Sigma” quality management system was successfully introduced in 2005. Further, Baosteel engages in strategic planning and has an integrated management system designed to regulate and assign responsibilities, executive order powers, and communication channels between business entities.
Corporate social responsibility (CSR) has also become increasingly important in recent years. Baosteel is ahead of this social trend, embracing CSR and bankrolling numerous social projects as early as 1990. For example, the establishment of Baosteel Education Fund is one of the most visible education awards nationwide. Its foundation has set up 38 Hope elementary schools and provides support for sustainability and environmental projects. To further substantiate its dedication to CSR, Baosteel is the first Chinese company to publish annual sustainability reports, which have appeared since 2005. Moreover, in 2006 the management announced a new slogan and goal centred around CSR. The slogan, “Green Baosteel, our common home,” is aligned with its goal of turning Baosteel into the cleanest and most sustainable steelmaker in the world.
The preconditions for turning the company into a global player are in place. First, Baosteel, since its founding, has never been a typical Chinese SOE. Second, it dates back only to December 1978, which coincides with the exact point at which the Chinese economic reforms got off the ground. Thus, unlike many SOEs, it was not burdened with the legacy of the Chinese communist past. Finally, it has been shaped by the cosmopolitan tradition of Shanghai, which is reflected in the long-lasting relationships and numerous joint ventures that the Baosteel Group holds with other global players.
Baosteel is prepared to confront the future and recognizes the enormous challenges it will bring. Special market segments in China have, for some time, seen higher growth rates and much higher demand levels than in other emerging markets such as India and Russia. To some extent, they have even caught up with those of industrialized countries such as the United States. The latest OECD research suggests that this trend is visible in every segment of the Chinese steel market and is projected to become more pronounced. At the same time, exports continue to grow despite the gigantic demand in China. In 2004, Chinese steel exports exceeded imports for the first time in history.
Endeavouring to meet the high demand at home, more than 90% of Baosteel’s turnover is in China. Additionally, to enhance its negotiating position in the competition for scarcer natural resources, it is planning further mergers and acquisitions at home and abroad, both horizontally and vertically (upstream and downstream) across the value chain. The current consolidation of the Chinese steel market and open access to international markets are making this strategy of acquiring new plants and integrating important mining sites possible. For example, currently, Baosteel imports 80% of the iron ore it needs. However, as early as in 2001 the company took a 50% share in the Brazilian iron ore mine Água Limpa, and in 2003 it acquired shares in Hamersley Iron, an Australian subsidiary of Rio Tinto. These equity positions are examples of Baosteel’s vertical movement on the value chain.
Moreover, loose partnerships and numerous meetings with other steel giants in Asia, such as Nippon Steel in Japan and Posco in Korea, nurture rumours that a merger may emerge.
Of decisive importance for the Baosteel Group’s strategic planning are not only the economic goals, but also the acquisition of international management experience. As such, internationalization efforts, such as those detailed in the remainder of the case with a focus on Baosteel Europe, are crucial.
Setting up a Subsidiary in Hamburg, Germany
Baosteel has been conducting business in Germany for a long time, though its activities have changed significantly over the years. In the beginning, it was impossible to think about selling steel products; rather its main task was to supply Chinese companies with vital replacement parts sourced in Germany for domestic production. This changed in 1993, when senior management decided to expand and founded Baosteel Europe GmbH with $6.64 million. Baosteel selected Germany for a very specific reason: the local courts provide European customers and suppliers with more legal protection than if business were to be conducted in Hong Kong or China. In other words, Baosteel considered the “rules of the game” regarding the legal infrastructure and enforcement across countries and made its location decision using the institution based view. Baosteel Europe is a wholly owned subsidiary Baoshan Iron & Steel Co., Ltd.
After deciding to locate in Germany, Baosteel also evaluated a number of German cities. Its decision to locate the business in the Hamburg metropolis was based on both economical motives (such as direct access to shipping routes) and cultural aspects. For example, Ye Meng, the current President of Baosteel Europe, states, “Hamburg and China can look back on a long history of partnership. There really are quite a lot of Chinese companies and trading entities here. The parent of Baosteel Europe GmbH comes from Hamburg’s sister city, Shanghai, which is also a port city. Both from a cultural perspective and for geographical reasons Hamburg in our opinion provides us with favourable conditions for the development of our company.” Additionally, the workforce, technology, and infrastructure in Germany are known to be world class. Further, Meng believes that earning the trust of German clients and selling “Made in Germany” steel parts in China have benefited the company greatly.
Indeed, Baosteel Europe’s business has been booming. In the last three years, turnover increased to $732 million. This means that Baosteel Europe is among the largest Chinese companies in Germany. While making a profit, Baosteel Europe is certainly not resting on its laurels. Not only is Baosteel Europe strategizing to increase its share of the global market, it is also seeking to expand in Germany and Europe with new products and innovations. As such, the Hamburg subsidiary is due for expansion with new specialists recruited. Under Meng, the structure of Baosteel Europe GmbH has changed considerably in the last four years. For example, in 2004, there were 30 Baosteel employees in Germany, and today there are 55—with additional employees in other offices throughout Europe, the Middle East, and Shanghai. The finance department and the Shanghai office are responsible for the internal organization of what happens in Hamburg. Looking after customers and suppliers is the task of each business areas (i.e., steel trading, spare parts and equipment, and metal products). Recently, the new business department has been given the mandate of expanding into new business areas. In order to manage a variety of tasks, the company employs individuals from a number of countries. In Hamburg, Chinese expatriates work side by side with Germans. In other subsidiaries in Europe, employees from the various host countries are in the majority. Taken together, it is apparent that Baosteel is a transnational company with a global outlook.
Business Areas of the Baosteel Subsidiary in Germany
Procurement, which was of considerable importance at the start of Baosteel’s activities in Germany, continues to play an important role today. The transactions involved are complicated and inter-culturally demanding, requiring good coordination. The procurement process is set in motion by a firm in a given location — for example a Chinese steelmaker in a province, which needs spare parts obtainable only from Europe. This requirement is relayed to the Baosteel head office in Shanghai, which subsequently transmits an inquiry to Baosteel Europe. The inquiry is received by a Chinese or German employee in Hamburg, who then places an order with a local (German) supplier.
After the spare parts arrive, another Chinese or German Baosteel employee arranges for them to be sent to China. Inquiry, order processing, and transport are dealt with in Chinese, German, and English, meaning that employees of both nations transact on many tasks together and must engage in an ongoing dialogue. Thus, at the Hamburg location business success absolutely depends on Sino-German cooperation, which is based on years of experience and mutual understanding. A Chinese department head supervises four tandems, each consisting of a Chinese and a German employee, who know each other and work together in a coordinated manner.
Steel trading, however, has a fundamentally different procurement process, wherein ten Chinese co-workers – most of whom are engineers – work under the direction of the internationally experienced deputy managing director, Guo Zheng. The working language is Chinese and in keeping with international business practices, English is used when communicating with the “outside” world. In steel trading, the German market plays a subordinate role. Sales orders are sent via Hamburg, where the contracts are concluded, to the whole of Europe and the rest of the world. The majority of customers value Baosteel’s quality, reliability, punctual delivery, and service. Although price is important in certain countries, Baosteel does not position itself in the lower price segment, preferring to have a price level akin to that of ThyssenKrupp and ArcelorMittal. In order to increase its market share in Europe, Baosteel is pinning its hopes on premium quality and customer orientation. The turnover volume, currently about 500,000 to 600,000 tons annually, is still a very small percentage of the total output.
The new business department is also managed by a Chinese expatriate with international experience. “New” refers both to new regions (such as the Middle East, Eastern Europe, and Africa) and to new activities (such as investments in sectors other than the steel industry). The current planning phase involves conducting feasibility studies (with the help of external expertise) and studying market entry methods.
Corporate Culture and Work Atmosphere
In recent years, Baosteel’s senior management has come to realize the importance of a common corporate culture – for both Chinese and foreign employees. In 2004, Baosteel implemented a program that stresses “good faith” and “synergy” as basic values and emphasizes the significance of culture as the basis of all economic action. It has been said that “Baosteel’s culture is the soul of management, while Baosteel’s management is the vehicle of culture.” The executives at Baosteel Europe emphasize words such as “integrity,” “teamwork,” and “loyalty,” and are thus transferring to all employees the essence and level of their cooperation with the head office in Shanghai. To stress the high opinion and importance of the local workforce, all German employees of Baosteel Europe were invited to stay in Shanghai for a week. There they were shown the organization of the head office, met their counterparts with whom they often telephoned or exchanged emails, and experienced Chinese hospitality—along with gratitude for their achievement and loyalty to the company.
The German employees have also been included in the Chinese bonus system in order to encourage their participation in the success of the company. At the bi-annual meeting involving all Baosteel Europe employees, management reports at length about the success and goals of the parent company and the Hamburg subsidiary, hoping to foster a community spirit. The German employees were also pleasantly surprised that the Chinese executives clearly try to respect German habits and customs by not expecting German employees to stay in the office until late in the evening, as is often the case with Chinese expatriates. Baosteel has come to understand and acknowledge that despite different work habits, in the end, the efficiency is the same. The German employees are also particularly appreciative of the respect with which Chinese superiors treat their subordinates. The experience of working together on a daily basis means that German employees at Baosteel certainly do not share the typically negative picture of China that is often painted by the media. Instead, most have developed a far more positive picture of China. Apart from the good atmosphere in the workplace, employees have additional motivations. Specifically, a large and expanding company is synonymous with safe jobs. This is especially true for Chinese companies, where protection against dismissal is based on the Chinese and Confucian belief that one has a duty to look after the well-being of others. The high one-off bonuses for special accomplishments confirm the appreciative attitude of the senior management.
Therefore, employee turnover is quite small in comparison to other companies within this industry. To advance within Baosteel, it is necessary to occupy a position of responsibility at the head office. As such, it is necessary for individuals to possess not only professional qualifications, but also have the ability to speak fluent Chinese.
Thus, many German employees who do not speak Chinese find it extremely difficult to reach the senior management level at Baosteel Europe. Overall, while challenges remain, Baosteel has overcome many of the cultural differences by taking time to understand those differences and finding ways to embed both the German and Chinese cultures within its organizational culture.
Human Resource Management (HRM)
In China, Baosteel enjoys a good reputation for its excellent compensation and career opportunities. To maintain its reputation and recruit top talent, Baosteel implements a very thorough recruiting process. Candidates for its comprehensive examination procedure are selected from a large number of applicants—all of which are university graduates. Unlike most companies in East Asia, Baosteel rarely recruits candidates jumping ship from other employers or at job fairs. However, once candidates are selected, the successful applicants are introduced to and trained in Baosteel’s corporate culture, which is a customary practice in Chinese firms. If the candidate does well over the course of the year, the company may cover the cost of further education – for example, a one-year higher education program at home or abroad. After this, the individual is likely to be promoted within the company and employed as a senior executive, alternating between China and other countries. Interestingly, until recently it had been considered a welcome opportunity for Chinese employees to be offered the opportunity to work abroad for a number of years, since it coincided with good pay and enhanced qualifications. However, because income and career opportunities have developed enormously within China in recent years, many consider this same “opportunity” or assignment to be a burden, especially since the quality of life in Shanghai is now higher than that in many Western cities.
In other words, Chinese expatriates now experience the same types of burdens as expatriates from developed countries, such as separation from their family or problems with their children’s schools overseas. Although Baosteel takes into account these reservations and offers its Chinese expatriates numerous incentives such as increased compensation and job guarantees for spouses, the willingness to work in other countries is declining.
However, for individuals trying to climb the career ladder, successful stints abroad considerably facilitate access to the senior management level and to executive posts in the subsidiaries and at the head office. More recently, Baosteel has expanded the scope of its HRM, becoming more strategic in nature. In addition to regular assessments, the skills of its employees are continually being enhanced by means of systematic
training. Further, preparatory country-specific or culture-specific instruction for foreign assignments is now available, as are returnees’ programs. Finally, the mentoring system is well organized and highly valued.
Talented young executives are watched over and given advice by mentors appointed to look after and guide them. As mentors rise in the company hierarchy, it will eventually lead to advancement for their “mentees,” who may also receive recommendations for employment elsewhere. This network system not only leads to good professional work, but is indispensable if one wishes to advance to a decision-making position.
Baosteel Europe Paves the Way for Integration and Expansion
For Baosteel, numerous economic and cultural aspects were of decisive importance when it chose Hamburg as its European location. Endeavouring for a win-win outcome, Baosteel Europe has developed a great relationship with the Hamburg city government, especially with its departments involved in economic development. Baosteel continuously manages this relationship by staying in touch with the media and having company representatives participate in and sponsor public events. Interestingly, Baosteel has also incorporated its German-oriented practices of external representation back in China, demonstrating its dedication to learning from global best practices. Baosteel has also begun to develop ideas regarding networking strategies with other Chinese organizations in Germany geared toward the joint promotion of their interests, and maintained loose partnerships with two other large Chinese corporations also located in Hamburg— COSCO and Bank of China.
Baosteel Europe is said to exemplify the “large Chinese corporation abroad” and it occupies a frontrunner role in two senses—being both a “test case” and a “model.” Many Chinese companies still find it difficult to be internationally competitive, and there is often a discrepancy between an impressive success story told at home and the hesitant progress overseas that may be marred by setbacks. This could change quickly if “pilot projects,” such as the internationalization of Baosteel, are a success and the senior management of other companies draws the right conclusions.
However, it is not only the views within an industry that are of importance. Chinese companies, especially those with international ambitions, must assume that they are being watched intently by the public both at home and abroad, and must behave in a responsible manner. After a rough start, Baosteel has made significant progress in recent years. Admittedly, the situation has been rather auspicious for the steel industry. An essential basis for further expansion in the international sector is a systematic development of HR beginning with recruiting, and leading to career planning and further education. Baosteel aims to use the talents of both German and third-country specialists and to form international leadership teams that will be in a position to meet the challenges of international management.
Further, in the case of international customer-supplier relationships, it is important to pre-empt cross-cultural conflicts by increasing the level of intercultural competence and strengthening an overarching corporate culture. Baosteel is well on its way to mastering these challenges, having already united a variety of very different companies in Shanghai and developing a distinct corporate culture among its employees. When discussing Baosteel’s “hard skills,” the former chairwoman Qihua Xie once coined the slogan “quality, not quantity.” The same can just as well be applied to Baosteel’s “soft skills.” Overall, the Baosteel Group is an exemplary company from which other Chinese companies can learn.
(from Peng. (2011) Global Business: International Edition. 2nd Ed. Mason: South Western Cengage Learning. pp 591 – 596.)
Questions 1 – 5 are based on the case study ‘Baosteel Europe’.
Question 1 (20)
With reference to relevant literature, critically discuss how the Chinese SOE, Baosteel, has benefited from both the globalisation of markets as well as the globalisation of production.
Question 2 (20)
Critically discuss Baosteel’s choice to engage in Foreign Direct Investment (FDI) in Hamburg, Germany. What location-specific advantages does Hamburg provide?
Question 3 (20)
Critically discuss the entry strategy which Baosteel adopted in entering Germany.
Question 4 (20)
“One of the biggest dangers confronting a company that goes abroad for the first time is the danger of being ill-informed. International businesses that are ill-informed about the practices of another culture are likely to fail. Doing business in different cultures requires adaptation.” (Hill, 2009)
Critically discuss the effectiveness of Baosteel’s efforts to adapt and integrate German cultural practices into the organisation’s existing business culture.
Question 5 (20)
Critically discuss how regional economic integration affects Baosteel’s expansion into Europe.
Please take note of the following guidelines:
Format: Assignments must be presented in 12pt Arial Font and in 1 ½ line spacing.
Structure: The assignment should be structured as follows:
o Title page (1 page)
o Table of contents (1 page)
o Question 1: Answer (approx 4 pages)
o Question 2: Answer (approx 4 pages)
o Question 3: Answer (approx 4 pages)
o Question 4: Answer (approx 4 pages)
o Question 5: Answer (approx 4 pages)
Length: Your answers to the five questions combined must be approximately 20 pages (i.e. 5000 words).
Only Utilise the Facts on Baosteel Mentioned in the Case Study: When answering questions 1 – 5 it is important that you restrict your analysis to the facts on Baosteel that are presented in the case study.
Use of Literature & Referencing: It is imperative that you utilise relevant literature in answering all four questions. At least ten texts (including textbooks and journal articles) should be consulted. In-text referencing must be provided. A bibliography must also be provided. The Harvard Referencing technique must be used.
Organisation: In answering each question you should give attention to the structure of your answers. Each answer should begin with an introduction and end with a conclusion. Learners should also give attention to the logical structuring of their arguments so as to ensure the coherent flow of discussion.
Professional Standard of Work: It is imperative that learners proofread and edit their assignment prior to submitting it. Assignments must be free from errors and of a professional standard.
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