Abstract: Necessities and difficulties are discussed for the consolidation & recombination of iron and steel enterprises in China in this article. We also put forward the basic conception mode of “market plus government” to carry out the consolidation & recombination of iron and steel enterprises together with the relative issues that should be considered.

Key words: iron and steel industry  consolidation & recombination  difficulties  ways

Enterprise consolidation & recombination are very popular as for foreign iron and steel enterprises in these years, that becoming the primary rhythm for the large international iron and steel enterprises to be big and strong. The centralization degree of the iron and steel industry is increased rapidly in the world, but by contrast, the centralization degree is on descending year-on-year in iron and steel industry in our country. In 2004, the top ten iron and steel enterprises were with the industrial centralization degree of 34.7%, but descended to 33.6% in 2005, and fell to 29% in 2006.Therefore, to accelerate the consolidation & recombination in iron and steel industry in our country is important and urgent in order to strengthen the iron and steel industry and enhance the industrial centralization degree of this industry.

Ⅰ. Effect for enterprise consolidation and recombination
1. Consolidation and recombination upgrading the centralization degree of iron and steel industry
At present, there are 21 iron and steel enterprises with the annual output of over 5 million tons, 53 iron and steel enterprises with the annual output of over 2 million tons, and hundreds of iron and steel enterprises with the annual output of 2 million tons or less in our country. Enterprise consolidation & recombination was applied in these years in this industry, but it still features low industrial centralization degree, a big number of enterprises but with small scale. The rapid development of local small and medium-sized iron and steel enterprises lowered down the proportion of big scale iron and steel groups and the industrial centralization degree. The output of the 21 iron and steel enterprises with the annual output of over 5 million tons only took the share of 50.54% of the total output in our country in the first half of 2007, 2.05% down from the same period last year. Iron and steel enterprises with the annual output of 1 million tons which referred as “big and medium sized” enterprises increased their total output by 14.52% from the same period last year, but that is still 4.34% less to the growth rate of the total iron and steel industry. Due to the low industrial centralization degree, especially most of the iron and steel enterprises are still under the extensive operation and development depending on their operation scale, thus the industry recombination is more difficult and repeated construction is hard to control, enterprises are with little self-innovation ability, and the elimination of the backward production forces is slowly progressed. The dominant force in the industry, which could effectively stabilize industry market, is much weakened， causing the disorderly competition between industrial enterprises and frequently fluctuated prices in the market. Resources, energy and environment also severely constrain the development of the iron and steel industry in these days. All above problems have become the great barrier for the sustainable development of the iron and steel industry in our country. So it is important and urgent for the iron and steel enterprises to recombine and enhance the industrial centralization degree. It is necessary to accelerate recombining several very large iron and steel complex of international competitive force with annual output of 30 million to 50 million tons, or even with annual output of 100 million tons.

2．Consolidation & recombination will make the iron and steel enterprises having a leap-forward development with high efficiency.
Enterprise consolidation and recombination is the only effective way to realize the leap-forward development for the iron and steel enterprises in our country. It can integrate the management and technology advantage from the predominant enterprises, and overall plan the purchase, transportation, production, marketing, research and development process. The newly recombined enterprises can exploit comprehensive advantage, carry out self-innovation, adjust production structure, eliminate backward production force, research and develop hi-tech content and high value-added products, lower down the purchase cost, and improve the anti-risk ability of the enterprises, thus becoming the global big scale iron and steel enterprise with comprehensive competitive force, and realizing the leap-forward development.
  
3. Consolidation & recombination enhance the core competitive power of the iron and steel enterprises
Core competitive power is the comprehensive advantage and ability of the enterprises, and it is exclusively possessed, valuable, un-imitated and non-replaced resource and competence for the enterprises. Core competitive power comes into being in the two following ways: one is the research and development inside enterprise, and another is to obtain outside the enterprise. Consolidation & recombination create the opportunity to obtain core competitive power outside enterprises. The consolidation and recombination of iron and steel industry is to consolidate and recombine the comparative advantages in some aspects (such as resources, technology, knowledge, brand, and sales management) of the enterprises which composing the elements of the core competitive force of the enterprises. After the recombination, the organic integrity of these elements shall be conducted for mutual complementary of advantages and sharing of resources, and forming the core competitive force of the enterprise.

Ⅱ. Difficulties faced for the enterprise recombination
1. Inaccurate conception for enterprises development
Some iron and steel enterprises especially some large state owned enterprises think that they are forceful and pursue scale expansion in order to be big and strong. Some domestic large iron and steel enterprises have set up cooperation or win-win relations through different modes, but the cooperation or win-win relations are either the strategic cooperation in the amount adding but with no intention of recombination of the available assets, or the loose cooperative relations with no assets recombination. Each enterprise still holds their own development concept and stress on their self-independent, forming or will form more and more duplication and reconstruction. With the development conception above mentioned, it is difficult to form integrated force to become the real big and strong enterprises, and difficult to surpass the steel giants in the world. The present status does not conform to the requirements of development policies for iron and steel industry and guidance for the iron and steel enterprises recombination. For instance, Anshan steel company and Benxi steel company is really reformed under the “amount add” mode and each still operated on their own conception: only beat their own drums together.
  
2. Fault of asset management system
The state asset management system of “consolidate possession, grading management” is still under operation. The so-called state owned enterprises are in fact possessed by “central government, province or local city government”: the government manages their possessed enterprises in the aspect of asset, personnel and enterprise operation. On that condition, enterprise recombination only means the poise between the related governments bargaining for their benefit. Though there is the development policies for iron and steel industry from the State Council, which should be applied by local places and departments, but most of the local governments or departments consider more of their partial development and benefit: they are used to be regulated by themselves and develop themselves. Sometimes they even take their countermeasure for the policy regulation and guidance. That makes enterprises more difficult in recombination. In order to promote the trans-provincial and trans-regional recombination of iron and steel enterprise and construct the big enterprise group with international competitive ability, it is necessary to have deep system reform, breakdown the mode of “each does things on its own way” of local regions and departments, recombine the self-developed iron and steel enterprises and conduct general plan to the enterprises.

3. Confliction of benefits distribution
Our country’s current financial and tax system is the “tax sharing system” and transfer payment system. This system makes the taxes into the income of central government, income of regional government, and income shared by both central and regional governments. Some local enterprises and governments worry about assignment plan after enterprises recombination, and they worry that enterprises recombination will reduce their local revenue, so they prefer a loose enterprise group instead of the consolidation and recombination with assets as the connection point. That is an interest barrier for the trans-regional recombination of strong enterprises. Some successfully recombined enterprises held the view that it is necessary to consider the overall situation according to the national economic development strategy and requirement of industry policy. If the recombination is reasonable in an overall view, the enterprise and local government shall agree the recombination even if the recombination is not conducted in their local places. It is necessary to affect or even the sacrifice the partial benefits for gaining the overall benefits. Of the course if the negative influence on the local finance is very big and covers  local finance, education, public health and other social utilities, the potential influence shall be reported to the upper governmental department and ask for settlement by transferring the payment. But the partial benefits shall not be put over the overall benefit, and the trans-provincial and trans-regional recombination of strong enterprises shall not be delayed or blocked.

4. Work position awareness of the managerial persons
Most of the managerial persons of the enterprises prefer to be the leader in their own enterprise instead of being at the lower managerial level in a bigger and stronger enterprise. They worried and are afraid of losing their leading position in the recombined enterprise, having no substantial power and personnel right. The worries are really the important elements influencing whether the recombination shall be conducted smoothly.   How to resolve this problem? The successful experience is that: firstly enlighten the managerial persons considering more for the public and for the overall situation; secondly, give proper arrangement to the managerial persons influenced by the enterprise recombination; thirdly, take some personnel measures.

5. Difficulities in solving historical problems
At present, all the state-owned iron and steel enterprises have some historical problems, such as heavy burdens for running social and auxiliary enterprises, overstaffing, and problems caused by the collective-mode. These actual historical problems need to be resolved step by step. The enterprise consolidation and recombination is an important and urgent problem, and how to arrange the historical problems is an inevitable issue in realizing the consolidation and recombination more rapidly. 

6. Short of interior motivation in enterprise recombination
The domestic and foreign experience of recombination of iron and steel enterprises reveal that when the market competition is fierce, the enterprise faces existing and operation pressure, there is more motivation in the consolidation, which is favorable for accelerating the progress of recombination. But at current stage of big development of iron and steel industry, most of the enterprises operate well and they have a strong intention to develop and expand by themselves. So the motivation for the recombination is not sufficient, and it is not urgent in the consolidation and recombination.

Ⅲ. Basic ways for consolidation & recombination
The government acts as an important role for the iron and steel enterprises recombination because state-owned iron and steel enterprises are under jurisdiction of different regional governments and these enterprises play an important role in the regional economic development. Under the current economic operation mode in China, the iron and steel enterprises must take the “government plus market” mode to fulfill their consolidation & recombination.
1. The government should exert their function in the process of enterprise recombination
① The government should support in policy. The government should support and encourage enterprises with vigorous development potential, professional operation experience, financing capability, technology property and capable person through different economic measures such as finance, currency policy, capital and foreign exchange to consolidate & recombine, thus the recombined enterprises will become the leading enterprise with international competitive force in a short period of time.
② The government should issue policy to maintain local benefits which have already been gained, consider the provincial and municipal benefits gained, and clear away the benefit barrier in the trans-regional recombination.
③ The government should advocate “energy conservation and discharge reducing” production, eliminate backward production force, restrict the aimless expansion of projects, so as to promote industry structure adjustment and enterprise recombination.

2. Market competition form the fundamental ways for enterprise consolidation & recombination
The experience and theory reveal that the enterprise operation scale depends on “market selection”. The scale expansion of predominant enterprises is for optimizing the industrial structure and improving function and effect of market allocated resources. Predominant steel enterprises can develop more rapidly than their industry, and can lower down the overall cost of the industry. The predominant enterprises can gain profit through next-to-low price, thus they are capable in initiating a more fierce price competition. When the prominent steel enterprises improve their competitive strength and lower down the profit-gain prospect of the opponents, the opponents have to draw back from the market, and the predominant enterprises will reasonably realize the scale expansion and market share improvement, thus the consolidation and recombination is naturally on the way.

Ⅳ problems considered for enterprise recombination
1. Recognition of the integrity after the enterprise recombination
The success of the enterprise consolidation and recombination does not only lie in the recombination itself but the key of success lies in the integration after the recombination. It is the decisive factor that the effective integrity between the recombined resources and the previous resources of the enterprise shall be achieved after ending the action of consolidation and recombination. The consolidation and recombination aims to win competitive advantage from the market and improve the efficiency and competitive ability of the enterprise. However it is difficult to realize this aim if the enterprise only has the good wish of recombination but is short of the effective integrity after the recombination.  In 1992, Coopers&Lybrand Accountant Consultation Company investigated the causes of failure of 54% consolidated & recombined enterprises and found that 80% of the failure is due to lack of integrity plan after recombination. For the iron and steel enterprises, they have their own features in the consolidation and recombination in addition to the common features for all enterprises, such as property right, tactic and strategy, enterprise culture, staff plan, asset management, finance management, etc. If the above aspects can not integrate effectively after recombination, the recombination is not a substantial one but only a kind of mode. It will not only realize the objective but may also damage some excellent enterprises. The recombination with no effective and efficient integrity is undoubtedly a failure. So the integrity after recombination is the key to decide the success of consolidation and recombination of iron and steel enterprises.

2. We shall prevent some small iron and steel enterprise with high consumption from avoiding the penalty of being closed and prevent local government seeking their benefits by means of “false consolidation and recombination”.

In order to avoid the restriction of the national industry policy, some small iron and steel enterprises may resort to false consolidation & recombination to escape government regulation and to enlarge their production force. Some local authority may also make some un-qualified small and medium sized iron and steel enterprises to be consolidated in order to enlarge their production scale and gain local benefits. This does not conform to China’s iron and steel policy. This kind of recombination can only be a large local enterprise with high energy consumption, high environment pollution and low production quality, and there is no unified recombination program and substantial technical innovation.

3. Government takes suitable steps and measures to promote enterprise recombination
Government’s supporting for the enterprise recombination does not mean to encourage all kinds of “getting to recombination” through all kinds of means. Whether an enterprise proposes to recombine or not depends on itself, and with whom it recombination depends on enterprise operational needing. The government takes suitable steps and measures to promote enterprises recombination.
References:
1. Li Fuyong, Thinking of Revitalizing Stock Assets in China’s Iron and steel industry Metallurgical Economy and Management, Mar.2007
2. Li Yongjun, How to sketch centralization degree prospect for national iron and steel industry, China Metallurgy Journal. Mar. 16th,2007
 (Liu Zhengang, office of Anshan Steel Cooperation Group; Liu Zhenfeng, public affairs department of Anshan Steel Cooperation Group )