CHINA ISN’T THE BIGGEST EXPORTER—YET
China exports just about everthing that the world’s consumer society requires. Yet surprisingly, it isn’t the world’s largest exporter. But soon it will be.
Last year, Germany ranked as the world’s leading exporter for the third consecutive year, with more than $970 billion in merchandise, World Trade Organization (WTO) data shows. However, its export growth of 7% was far outpaced by China, with a gain of 28%.
China is expected to move into the No. 1 spot as early as 2010, the Organisation of Economic Co-operation and Development found in its recent Economic Survey of China. By then, it says, Chinese goods and services could represent as much as 10% of global trade, compared with the 2005 share of 6%. The value of China’s exports, however, depends on who’s counting—a recent comparison of China’s and other trading partners’ figures found significant discrepancies.
“Most people in the United States and elsewhere have no idea that Germany is the world’s leading exporter,” says Gary Clyde Hufbauer, Reginald Jones senior fellow at the Institute for International Economics, a Washington, D.C.-based research group. “But German export growth is not likely to rise, especially since the euro is likely to appreciate.” German exports are fueled by high-end machinery, automobiles, chemicals, metals and consumer electronics.
China, with exports of $762 billion last year, also lags behind the No. 2 ranked United States, which sent out $904 billion in goods in 2005. But with 10% growth last year, the United States, which has traded the No. 1 slot with Germany over the past few years, soon will be overtaken as well.
“There is no way to easily erase China’s low-cost capabilities,” says Joseph Massey, professor and director of the Center for International Business, Tuck School of Business at Dartmouth College.
That will leave Germany to produce higher value-added items, Massey says, although China is making strides in that area as well. “The Chinese have increasingly gone up on the technology and quality side,” he says.
WILL MILLS GET BACK INTO DISTRIBUTION?
What’s old is new again.
U.S. steel mills spent years divesting their service center assets because of conflicts that cut into earnings. But with the industry awash in cash, the subject has become more than water-cooler talk.
Mittal's acquisition of Arcelor SA has stirred speculation because it gave the behemoth a European distribution system. Mittal is expected to seek even more distribution assets.
During the takeover battle, Mittal vowed to sell Arcelor's Canadian producer Dofasco Inc. to Germany's ThyssenKrupp AG, which would create a powerhouse combination in North America since Thyssen is a producer in Europe but a distibutor in the United States. As of press time, Arcelor was objecting to giving up Dofasco and Thyssen said it would explore building a U.S. mill. Additionally, Esmark Inc.’s bid for Wheeling-Pittsburgh Corp. would create a mill/service combination in the European model.
“Mittal changed the whole game plan for everyone,” says Nicholas C. Tolerico, who retired as the president of ThyssenKrupp Steel Services of Richburg, South Carolina, at the end of last year. “People started thinking about the whole industry again and what it’s going to look like.”
With the era of horizontal integration—mills buying other mills—in full swing, the question mills now face is: “What do they do for an encore with Wall Street?” he says. “They can’t just sit there and not grow. They need to continue to expand their sales and earnings.”
Mills maintain that a re-integration is not in the cards. “Every year, we look strategically at the overall landscape, and acquiring service centers is not a direction that we would take at this time,” John P. Surma Jr., chairman, president and CEO of Pittsburgh-based U.S. Steel Corp., said in a statement.
But steel analyst Michelle Applebaum, of Michelle Applebaum Research in Highland Park, Illinois, says mill/service center combinations could help the industry overcome long-standing problems. Mergers could help eliminate the destructive cycle of overbuilding and over-liquidating inventories—or surges and purges—that hurt profitability.
What made for problems in the past was that most of the mills ran their service centers as stepchildren—foisting off steel they couldn’t get rid of, for example—rather than as separate profit centers, Applebaum says. Inland Steel Co.’s management of Ryerson was a notable exception, she says, and was spun off not because the combination failed, but as a way to maximize shareholder value.
What would make for greater efficiency would be an improved flow of information between the two ends of the business so that production would be more in sync with demand. If the mills could avoid making the same mistakes and run the service centers hands-off, they’d have a good barometer of what was happening at the customer level, Applebaum says, and “a related but diversified cash flow stream, making for a very symbiotic relationship.”