TECS 2013: Touring Bao Steel

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The glow of molten steel was fixating even from my vantage point 50 feet away from the mill. I could feel the heat of the bar on my face and neck.  Hissing steam burst upward as the metal slab raced through the press, compressing, stretching and cooling under surges of water and the chatter of hundreds of wheels and cranks. When the steel rolled out the other side it had transformed; it was longer and thinner, but still as bright and red as lava.

Molten steel!

I have called myself an engineer since the day I entered college, but in all my years I have never seen real manufacturing. On this trip to Bao Steel, I was galvanized by how iron ore was melted down, compressed and shaped from human machinery into a steel roll weighing over 30 tons. My education has taught me to think about things theoretically and I have only known numbers and quantity from the scope of my pencil and paper.  In this instance, however, I think I finally realized the difference between “knowing” how something is manufactured and understanding it through sight. Bao’s manufacturing just scratched the surface of this realization in comparison to Foxconn and its high tech devices.

This unforgettable Wednesday, started out like most of my other days in China – bright and early with hot, smoggy skies. Before going to Bao Steel’s manufacturing plant we got to meet with one of the company’s Vice Presidents. This meeting opened with a super cheesey informational movie; after a few minutes I lost count of the number of times the voiceover said “synergy.” The VP, however, was a very sweet woman and gave us a lot of incredible insight into the company, which I’ll attempt to summarize here:

Bao Steel

  • 10 years on Fortune 500
  • 4th biggest crude steel producer in the world
  • 2nd highest overall profits of steel producers in the world, but incredibly close behind competitor Pesco
  • 130,401 employees
  • 23 overseas sales subsidiaries
  • 39 marketing branches worldwide as well as 11 trading companies
  • $45.7 billion in revenues
  • 45 million tons of steel produced per year
  • 85% of steel produced is sold in domestic market
  • 1 single roll of steel can weigh between 26 – 40 tons

It should become quite obvious right away that Bao is a massive company. Its history has been filled with mergers and acquisitions, both of which have contributed to higher consolidation at the cost of weakened efficiency. While it’s core industry is carbon steel, it also sells stainless steel and a cheaper “special” steel brand. Most of the steel it produces is segmented for use in the automotive, home appliance, engineering/machinery, and construction industries.

What surprised me most from our conversation with the VP was the fact that despite its high profits, Bao and other steel manufacturers faced extremely low margins. This seemed counterintuitive considering steel is in just about everything humans produce these days – how could it possibly post low margins?

As the VP explained, the ore mining industry is consolidated with a few major players controlling most the market. Because of this and the fact that mining is deeply technical and requires high capital, mining companies can set steep ore prices. Meanwhile, steel manufacturing companies are widespread in China and the world. The only way to survive is often to develop better technology and undercut competitors by reducing the sales price of steel. The combination of these two phenomena has resulted in very high ore costs and very low steel prices.

In her closing, the VP discussed the future of Bao and how it is linked to diversifying the company’s holdings. While the list included resources development and logistics, steel processing, engineering and technology, coal chemicals, financial investment, and production services, the one item that wasn’t listed on her presentation, but was absolutely implied, was real estate. This seems to be a common theme among big companies in China with lots of capital and I just wonder what the future will hold – the memory of GE Capital is still fresh for most Americans…

It was at this point that our small Stanford group got a special tour of one of Bao’s hot rolling mills. I did my best to describe the experience above, but words and even pictures don’t do justice. The experience was simply incredible. Despite the grime, heat, and toxic smells, it was so magnificent to see once again how human intelligence could produce machines that literally transformed earth and metal. Seeing the steel manufacturing process was a great reminder of the power of human innovation over the last century.

The tour of the plant ended in about twenty minutes and soon enough we were on our way to a company that has gained a lot of media attention in the US for their manufacturing practices – Foxconn.

*TECS 2013 is short for my adventures with Stanford University's TECS two week immersive business and technology program in China. Over the next two weeks I am travelling from Beijing to Shanghai and meeting with incredible businesses along the way. All posts from the program will be tagged.