China Steel: a bright spot among public enterprises

Most of the 15 state enterprises which dominate Taiwan's heavy industry are under stern fire these days.

Legislators, businessmen, and economists blast them for alleged wastefulness and inefficiency. They argue that some of the firms are a heavy drag on the economy and should be closed or turned over to private hands.

But virtually everyone makes an exception of China Steel.

In four years of operation, the Kaohsiung-based integrated steel mill has demonstrated an outstanding record of productivity and profitability.

And the sprawling firm is now expanding its operations, which should help it compete with highly efficient Japanese steel makers in the domestic market and possibly reduce Taiwan's imports of the product.

The man credited with establishing the basics of good management, Chairman Chao Yao-tung, has now moved on to promote his philosophy as Taiwan's minister of economic affairs. But the general opinion here is that he has left China Steel in good hands -- those of his former lieutenants, T. K. Liu, now chairman of the company, and Fu Tze-Han, the president.

The changeover at the top comes at a critical time, however. In an interview, Mr. Fu spoke of the constant battle to keep China Steel profitable in the face of rising raw-material and wage costs, intense competition from producers like Japan and South Korea, and shrinking demand for steel in a world recession.

This last comes at a time when the corporation has just enlarged its production capacity from 1.5 to 3.25 million tons of crude steel a year. Two more expansion phases had been planned to raise the mill's capacity to 8 million tons a year.

But according to Mr. Fu, ''The start of third-phase construction has been suspended due to the poor economic climate. We will not resume until there are clear signs that the world economy is making a strong recovery.''

Life has never been easy for China Steel. Originally intended to be a private company, it fell into government hands when a major foreign investor (an Austrian steel mill) pulled out very early on and the Taiwanese private sector showed no interest in putting up the hundreds of millions of dollars required for construction.

(The second-phase expansion alone cost an estimated $1.3 billion.)

With a 97 percent shareholding, the government has exercised its control most strongly in the area of price.

''We have great difficulty in raising our prices,'' explains Mr. Fu. ''Steel is a very significant item for a number of strategic industries like construction, shipbuilding, and automobiles, so the government is committed to holding down the price as much as possible.''

Another inhibiting factor is that China Steel must compete head-on in the local market with the super-efficient Japanese.

Mr. Fu says China Steel's domestic and foreign prices must be brought below those of its foreign competitor. This is a tough job in view of Japan's reputation for highly cost-efficient blast-furnace operation.

Taiwan currently imports about 1.4 million tons of steel products a year from Japan -- primarily hot- and cold-rolled sheets and coils used for automobiles and consumer electronic products.

But Mr. Fu believes that figure can be drastically slashed now that the second stage expansion at Kaohsiung gives China Steel a capability in these very same products. In the process, however, the corporation has had to sacrifice its profit margin.

Unable to raise its product price, China Steel has had to absorb steep cost increases for raw materials like coking coal and iron ore, all of which have to be imported, as well as annual wage increases in excess of 20 percent.

(This year workers at China Steel, however, like those of most other concerns , will get only a single-digit raise.)

How to cope? According to Mr. Fu, China Steel has operated at over 100 percent of its design capacity for the past two years, steadily increasing labor productivity while cutting down on energy and raw-material consumption.

''Last year we produced 360 metric tons per man. This year, I reckon we will increase that to 400 tons, which is as good as many Japanese mills, considering the wide range of products we are producing,'' the president says proudly.

Even when China Steel goes ahead with its third- and fourth-stage expansion projects, its eyes are firmly fixed on the domestic, not international, market.

''If the domestic market cannot absorb all our production, of course we must export the balance. But primarily we are producing steel for the domestic market ,'' says Mr. Fu.

Last year, the Kaohsiung mill provided about 30 percent of local consumption. This year it expects to see that increase to between 50 and 55 percent.