It's out with the old and in with the new as Zhangjiagang city looks to new ways of conducting business

China's largest private steel company, Shagang Group, plans to move away from steel as its primary business in as little as three years. The seismic shift being considered by the steel stalwart, unthinkable during the boom a decade ago, is the clearest indication to date of the mounting pressure traditional manufacturing sectors in China are facing to stay viable in a rapidly changing domestic and global market.

But in the city of Zhangjiagang in Jiangsu province, the base for Shagang's steel mill operations, some domestic and foreign companies see opportunity in the challenges besetting traditional industries.

They are the flag bearers of the so-called emerging industries and they have begun to set up production facilities across the city.

Nachi (Jiangsu) Industries Co Ltd, which makes prevision cutting tools, among others things, is one of the high-tech companies that has been attracted to Zhangjiagang. Song Wenwei / China Daily

Among those prepared to take a punt on what they perceive to have huge potential in the evolving Chinese market are German solar energy material manufacturer Krempel Group and Japanese machining and robot manufacturer Nachi Group, both of which set up operations in Zhangjiagang last year.

It is no coincidence that these companies chose to do business in the small but economically dynamic city on the Yangtze. Often held up as a success story of China's rapid industrialization and urbanization, Zhangjiagang has implemented a number of progressive development policies to attract investment from emerging industries.

Success, or failure, is likely to be viewed as a weathervane for other economic zones across the country.

"If we want to keep economic growth and also leave a beautiful city for generations to come, we have to transform the city and reduce our reliance on traditional industries and increase our innovation in emerging industries," says Yao Linrong, Party chief of Zhangjiagang.

"We need to develop an economy with low resources, low energy consumption and low emissions."

While China maintains pride of place as the world's manufacturing hub, industrial transformation has been a strategic objective for the country in recent years as it seeks to mitigate expected cuts to employment and to government revenue that follow further decline in the profit margins of traditional sectors.

The old bastions of business are being encouraged to diversify, or at the very least to operate in a more fiscally sustainable fashion way. On October 15, the government announced it would block new projects in a number of sectors suffering from overcapacity, including steel, aluminum, shipbuilding and cement.

Zhangjiagang, ranked in the top three of China's 100 county-level cities in terms of comprehensive competitiveness, needed little prompting to embark on a program of industrial reform.

Traditional businesses, such as printing and dyeing, have been moved out of the city's 120 square kilometers of prime industrial land and into less developed regions to make way for new projects.

Bigger companies in traditional industries have been encouraged to introduce new technology and diversify their brands. Companies that deal in cutting-edge technology, new energy and new materials have been courted and assisted in setting up shop.

Since 2010, the city has invested 54.3 billion yuan ($8.9 billion) in emerging industries, which accounts for more than 52 percent of Zhangjiagang's total industrial investment over that period.

The outlay is showing early dividends. In the past two years, revenue of companies in the emerging industries category has risen 30 percent a year.

Last year, the output value of emerging industries was 182.5 billion yuan, about 40 percent of the city's total industrial output. By 2015, it is expected to account for 50 percent.

Yao says traditional industries rode a boom driven by insatiable market demand after the country opened up in the 1980s. Between 2000 and 2008, Zhangjiagang's revenue rose from 1 billion yuan to 10 billion yuan.

But the days of easy money are now a thing of the past.

"The market has been saturated and margins in traditional sectors have been affected for years by a massive supply glut, leaving many firms suffering heavy losses and reliant on government subsidies," Yao says. "Industrial transformation is urgently needed."

Shagang Group president Wang Xinghong revealed the steel giant is already preparing to diversify business, even though her company is still turning a tidy profit.

In the first half of this year, Shagang made a profit of 1 billion yuan and still employs about 20,000 of the city's 1.3 million residents.

But "occasional over production" and consistent "overcapacity" together with high raw material costs mean that while demand is still strong, profit margins are shrinking.

"The saying now is that you only make (the cost of) a bottle of still water on one ton of steel," Wang says.

In addition to investing heavily in Australian iron ore projects to lower raw material costs, Wang says the company plans to break into the logistics business. The move would see Shagang set up a logistics network that would keep its own transport overheads down for its steel division, while making additional profit from moving bulk goods, small freight and even mail.

That said, Wang says she is confident Shagang will continue to increase its output of steel products as it attempts to increase exports to foreign markets such as South Korea. But she conceded ever-shrinking margins mean steel is unlikely to be the most profitable arm of the company.

"It's a hard time for steel mills in China, so we must transform," Wang says. "In the future, we'll make bigger revenue in sectors other than steel. It's still too early to say at what time the diversified sectors will make more profit than steel. The logistics project we have is still under construction. Maybe in three to five years, we'll see a big change in this area."

An important part of Zhangjiagang's industrial revolution is attracting the right type of new investment.

Ma Xuefeng, deputy director of the Zhangjiagang Bureau of Commerce, says the city has picked companies with strong prospects. Between January and August this year, Zhangjiagang gave the green light to 29 new projects from companies from the emerging high-tech industries, reaping an investment bonanza worth $750 million, or 85.2 percent of the total investment during that period.

"Companies or projects that create pollution and use a lot of energy are finding it more difficult to do business here, even if it means a lot of money and job opportunities for the city in the short term," she says. "We prefer companies that are environmentally friendly, especially those dealing in new equipment, new energy and new materials."

Krempel Solar Material (Jiangsu) Co Ltd, a solar materials manufacturer and subsidiary of Krempel Group of Germany, is among the new breed of businesses to set up in Zhangjiagang.

Its general manager, Marius Stuckenberger, says it decided to invest after exhaustive research to find a location that would fulfill key criteria, including a stable workforce, support from local authorities and customer satisfaction in terms of logistics.

"Of all places we looked at, Zhangjiagang fulfilled the criteria best," he says.

His sentiments were echoed by Satoshi Hamamoto, vice-president and director of Nachi (Jiangsu) Industries Co Ltd, which makes precision cutting tools, hydraulic equipment, industrial robots and automotive solenoids.

"It is not a big city, but it is clean and quiet, with a good security environment," he says. "Also, the support facilities are quite good and it is close to Shanghai and other cities of Jiangsu province, where we have longstanding suppliers and clients."

Gu Weibin, director-assistant of the Zhangjiagang Economic and Technological Development Zone administration commission, says the city's economic hotspot now boasts more than 3,000 companies and an output value last year of 75 billion yuan.

Textiles manufacture, which used to account for half of the region's total output, now only accounts for 30 percent. In its place, the city's development zone has six companies that make robots and robotic components. To cater for the rise of this sector, a specialized industrial and research park is being built that officials predict will generate 6 billion yuan by 2016, and 20 billion yuan by 2020.

Hamamato says Nachi (Jiangsu) has opened a research division that aims to create cheaper robots, specifically tailored to the Chinese market. But one of the big hurdles, he says, is attracting and retaining skilled talent.

Yao, the city's Party chief, says about 90 percent of Zhangjiagang's 3,000 graduates every year choose to stay in the city, but some specialized skills still need to be imported.

Yao concedes the long road to industrial transformation is paved with difficulties, but the alternative route is the short one to ruin.

"Transformation is a slow process. There are specific problems that arise in every process," Yao says. "But we are constantly looking for more efficient ways to help the city transform as quickly as possible."

Contact the writers at songwenwei@chinadaily.com.cn.

(China Daily USA10/28/2013 page16)