Applying Porter’s Five Forces Model, explain competitive level for Vietnam coated steel sheet industry

This study, I will apply Porter's Five Forces Analysis to understand the competitive environment of the coated steel industry. It has similarities with other tools for environmental audit, such as PESTEL analysis. It focuses to analyze the industry environment while the PESTEL focuses on macro environment.

According to Porter (1980), five competitive forces include three forces from horizontal competition: the threat of substitute products, the threat of existent rivals, and the threat of new entrants; and two forces from vertical competition: the bargaining power of suppliers and the bargaining power of customers[1].

Figure 3.1: Porter's Five Forces Model.

Source: Web-books.com

Threat of Rivalry:

-          Threat of the market leader: Hoa Sen's market share has grown continuously in recent years, in 2010, its market share accounted for 34%, increased 37% in 2011 and reach nearly 40.5% in 2012[2].

-          Threat of both high quality products and production capacity from the competitors that possess the advanced technological production lines: For example, Ton Phuong Nam (SSSC, is a  joint-venture of Southern Steel Corporation and the foreign partners such as Sumitomo Corporation (Japan) and Federal Iron Works SDN.BHD (Malaysia), started setting up the new factory with  investment cost of 70 million USD in Nhon Trach II, Dong Nai, on June 22nd, 2012, the new plant has a design capacity of 230,000 tonnes / year mainly supply galvanized, galvalume products, and PPGI. The new plant is expected to go into operation in 2014, to increase production capacity tripled[3].

-          Threats from the foreign direct investment enterprises (FDI) with a strong financial strength, global distribution network, the high technology and high production capacity. For example, the hot-dip galvanizing line (240,000 tons per year) and color coating line (96,000 tons per year) of Sunsteel (Sunsco) are preparing put into operation this year[4].

-          China’s export possibility:

In 2011, China's coated sheet output was 5.8 million tons, up 8.3% year on year[5]; As for the demand, affected by the real estate suppression policies of Chinese government, the growth in the demand for ordinary coated sheets in China in the next two years will be limited. Therefore, export is a main solution for output of Chinese coated steel industry, directly threat to markets around the region including Vietnam. Sep 2012 by VSA, narrow strip galvanized steel imported from China increased 131% over the same period last year[6].

Figure 3.2: China’s Coated Sheet Output, 2007-2015E (Unit: kiloton).

Source: ResearchInChina; China Iron & Steel Association.

-          High fixed costs: Result of high fixed costs in an economic of scale effect that increases rivalry. In steel industry, the total costs are mostly fixed cost, the firm must produce near capacity to attain the lowest unit costs. Since the firm must sell this large quantity of product, high levels of production lead to a fight for market share and results in increased rivalry. Speaking through a recent press, VSA (Vietnam Steel Association) assesses that the increasing of supply that far exceeds the demand, so that, domestic steel companies competed fiercely[7].

Specifically, in May 2013, many steel businesses in northern continuous to discount the selling prices, reduction level of about 400-600 VND per kg. There are some companies discounted 4-5 times a month to gain market share.

-          High storage costs cause a producer to sell goods as soon as possible. If other producers are attempting to unload at the same time, competition for customers intensifies. In the context of the current recession, outlet for steel enterprises is produce perfunctorily, to pay the interest, depreciation and maintaining the workforce. Businesses often have 2-3 times the monthly sales discounts, making steel market prices are currently lower than the the production prices[8].

-          Low levels of product differentiation is associated with higher levels of rivalry. Brand identification, on the other hand, tends to constrain rivalry. Coated steel industry has very low barriers in terms of product differentiation as it doesn't fall into the luxury or specialty goods and thus does not have any substantial price difference. However, certain companies like Bluescope Steel and Sunsteel may enjoy a premium for their products because of its quality and its brand value created many years back.

-          Industry growth:  Vietnam's steel market consumption is about 13 million tons per year in 2010, the industry growth stabilized at 10% after a strong recovery in 2009. Relatively high growth stage 10 years ago, approximately 17% per year growth trends are quite (except for 2008 due to the recession). But, in 2011, due to the economic downturn would impacted the steel industry that is negative growth 2.3%, in 2012 grew only 3%[9]. According to VSA, in 2013, the entire steel industry targets growth from only 2%-3%[10]. Thus, in this recession period the steel industry is impossible to attain a tremendous growth as in the past.

-          Intermittent overcapacity: A larger number of firms in the steel industry increases rivalry because more firms must compete for the same customers and resources.

Supplier power: In the steel industrial context in Vietnam now, the supplier power is quite low. Because:

-          Production capacity of Cold Rolled Coils (CRC) now is beyond demand in the country: According to the Vietnam Steel Association forecast, the consumption of galvanized steel products in Vietnam market in 2015 will reach 450 thousand tons; For PPGI products will reach 700 thousand tons in 2015[11]. Actual figure of cold rolled steel demand of Vietnam in this moment, in 2013, by 1.3 million tons per year according to Posco Vietnam. Therefore, total demand for coated steel sheets is 1.15 million tons while the production capacity of CRC now reached 4.3 million tons. While export routes due to difficulties of the technical barriers and anti-dumping in the importing country, for example, started in 2013, the cold rolled steel exported by Vietnam to Indonesia will be imposed an anti-dumping duty of 13.5% - 36.6% according to a final decision by the Komite Anti-Dumping Indonesia (KADI) issued in Dec 2012[12].

-          There are some major customers of Posco Vietnam: Till now, only a few galvanized  manufacturers can order large quantities of CRC products. It is easy to calculate roughly as follow: The biggest coated steel manufacturer is Hoa Sen, could produce CRC by itself. Next companies, such as: Sunsteel, Nam Kim and Dai Thien Loc also could produce the CRC for their coated steel products, in addition, they may order from Phu My Flat Steel (PFS) and Thong Nhat Flat Steel (TN Flat Steel). Ton Phuong Nam also orders CRC from PFS.

The remaining are Ton Dong A with expected sales in this year is 150,000 tons; suppose that BluesScope Steel keep the same sales quantity as last year, 70,000 tons. So that, the demand of CRC in domestic is only remain 220,000 tons.

Assuming the two manufacturers are focused to order for Posco Vietnam, its output still below average, around 30,000 tons of orders per month compared with the production capacity is 100,000 tons per month.

-          Supplier switching costs: in steel industry, this cost is very low, because the input material is not required the differentiation.

Buyer powers:

-          Buyer concentration and Buyer volume: Buyers are concentrated - there are a few buyers with significant market share, each coated enterprise has a few dozen customers, however customers accounted big rate just only around 10. Therefore, the bargaining power of customers in this industry is quite high.

-          According to VSA, steel import mainly CRC, galvanized steel sheets, PPGI, hot rolled steel plate and construction steel is still flowing from China into Vietnam. Particularly, hot rolled coils (HRC) in 2012 was imported more than 3 million tons. Fox example, in 2010, about 440,000 tons of CRC imported, in 2011 around 228,000 tons of cold-rolled steel have been imported to Vietnam. From early 2012 the import duty on cold rolled Vietnam has increased from 0% to 5% but, in the first half of 2012, still nearly 50,000 tons of cold-rolled steel imported. Therefore, the threat of imported galvanized steel and PPGI also increases power of buyer.

-          Threat of backward integration: The buyers threaten backward integration  the producers, this kind of threat in coated steel is very low. Because steel industry requires a huge investment capital.

Threat of substitutes:

-          Threat of substitutes: Galvanized steel sheet is limited number of substitutes, that means customers cannot easily find other products that fulfill their needs. Although usage of aluminum and stainless steel has been rose continuously in the automobile and consumer durables sectors, it still does not pose any significant threat to steel as the latter cannot be replaced completely and the cost differential is also very high. So, threat of substitutes is medium to low.

-          For example, China’s aluminum demand will grow 8-10 percent annually on average for the next five years on uses from beverage cans to cars, driving up prices over time. China accounts for about 40 percent of global consumption of aluminum. The metal, used in construction, beverage cans, electronics and the automotive sector[13].

Figure 3.3: Consumption of aluminum on the world (2012). Construction and transportation sectors are the largest consumers of aluminum.

Source: CRU Strategies (2012)

Threat of new entrants:

-          For example, one continuous galvanizing line (CGL), with capacity of 400,000 tons per year[14] of China Steel Sumikin VN (CSVC) is currently under construction[15].

Size of the mill:

+ Capacity: 1.6 million metric tons per annum, including 1.2 million tons of Cold Rolled Steel (CRC),  400,000 tonnes of GI and 300,000 tonnes of magnetic steel sheet.

+ Equipment: Heavy gauge shearing line, pickling and tandem cold rolling mill, continuous annealing line, continuous galvanizing line, and annealing and coating line.

+ Total investment:     USD 1.15 billion[16]

Another project, is the continuous hot-dip galvanizing line of  Posco Vietnam is under the stage of feasibility study.

-          Barrier of investment capital: Steel industry is a capital intensive business. For example, TDA’s project with total capacity of 650,000 tonnes per year accounted a total investment of 105 million USD[17]; SSSC’s Project is 70 million USD; Sunsteel’s Project is 120 million USD. Therefore, the steel industry is a market not for the companies with small capital to participate.

-          Low cost barrier: The major of low cost drivers is economies of scale, benefits of economies of scale are derived in the form of lower fixed cost per unit and better bargaining power of raw materials. Companies with large market share, such as Hoa Sen, Ton Dong A and Sunsteel will have the advantage of low cost which increases barriers to entry for new entrants.

-          High profit advantages: It may be noted that those steel companies, which are integrated, have their own key raw materials such as cold rolled steel coil, and this protects them for the potential threat for new entrants to a significant extent. For example, Hoa Sen invested in cold rolling mill in 2007 to active of raw materials and gaining additional gross profit from the production stage of CRC. Middle of 2014, TDA starts producing cold-rolled steel (CRC) from the hot rolled steel (HRC) will increased the marginal profit. Import tax of HRC is 0% compared to 7% of cold rolled steel in order to encourage the production of domestic cold-rolled steel. By this way, TDA may increase the gross profit of the company by about 3-4%. The higher profit companies can afford higher investment, thereby resulting in increasing competitive advantage, increase barriers to entry in industry.

Dinh Long

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[1] Porter, M.E. (1980). "Competitive Strategy: Techniques for analyzing industries and competitors" New York: The Free Press.

[2] Source: Hoa Sen Group’s Annual Report 2010, 2011 and 2012.

[3] Ton Phuong Nam. (2012). Khoi cong nha may Ton Phuong Nam 70 trieu USD tai Dong Nai. Retrieved on June 30^th, 2013 from the website: http://www.tonphuongnam.com.vn/newscontent.aspx?cateid=36&contentid=506.

[4] Japan Metal Bulletin.(2011). “Maruichi Steel Tube Starts to SUNSCO Expansion in September 2012”. Retrieved on June 22^nd, 2013 from the website: http://www.japanmetalbulletin.com/?p=18905.

[5] Research in China. (2012). "China Coated Sheet Industry Report, 2012-2015". Retrieved on June 30^th, 2013 from the website: http://www.researchinchina.com/Htmls/Report/2012/6333.html.

[6] Vinacorp.vn. (2012). "Vao mua xay dung, thep ton kho tren 300,000 tan, van tang cuong nhap khau". Retrieved on June 30^th, 2013 from the website: http://www.vinacorp.vn/news/vao-mua-xay-dung-thep-ton-kho-tren-300-000-tan-van-tang-cuong-nhap-khau/ct-533565.

[7] Phong Thuong Mai va Cong Nghiep Viet Nam.(2013). “Han che xuat khau ton ma kim loai sang Thai Lan va Malaysia”. Retrieved on June 22^nd,2013 from the website: http://chongbanphagia.vn/diemtin/20130617/han-che-xuat-khau-ton-ma-kim-loai-sang-malaysia-thai-lan-0.

[8] Huong, T. (2013). "Nganh thep vat va voi hang ton kho". Bao Dau Tu. Retrieved on June 22^nd, 2013 from the website: http://baodautu.vn/news/vn/doanh-nghiep/vat-va-voi-hang-ton-kho.html

[9] Van, N.(2012). “Nam 2012, tong tieu thụ ngenh thep tang 3%”. Kenh thong tin Dau tu-Tai chinh-Chung khoan Cafef.vn. Retrieved on June 22^nd, 2013 from the website: http://cafef.vn/vat-lieu-xay-dung/nam-2012-tong-tieu-thu-nganh-thep-tang-3-2012123102553148ca54.chn.

[10] Nhung, S.(2013). "Nganh thep lao dao". Nguoi Lao Dong. Retrieved on June 22^nd, 2013 from the website: http://nld.com.vn/20130430095839253p0c1014/nganh-thep-lao-dao.htm.

[11] Anh, L. (2012). "Thi truong ton ma Viet Nam: Nhieu tiem nang". Bao Xay Dung dien tu. Retrieved on June 24^th,2013 from the website: http://www.baoxaydung.com.vn/news/vn/kinh-te/nhieu-tiem-nang.html.

[12] Nam, V. and Nguyet, T.(2013). "Thep can nguoi bi Indonesia ap thue ban pha gia". The Saigon Times. on June 24^th,2013 from the website: http://www.thesaigontimes.vn/Home/kinhdoanh/xuatnhapkhau/90020/.

[13] Bloomberg News. (Apr 11, 2012). “China Aluminum Demand Growth to Drive Price”. Retrieved on June 22^nd, 2013 from the website: http://www.bloomberg.com/news/2012-04-11/china-s-aluminum-demand-to-grow-at-8-10-novelis-says.html.

[14] Japan Metal Bulletin. (2011). "CSC to Start Construction of Vietnam Cold rolling Mill in July". on June 22^nd, 2013 from the website: http://www.japanmetalbulletin.com/?p=2894.

[15] Linh Thu. (2013). “$1.15bn steel project comes online in style”. Vietnam Investment Review. Retrieved on June 22^nd, 2013 from the website: http://www.vir.com.vn/news/en/investing/$115bn-steel-project-comes-online-in-style.html.

[16] Sumitomo Metal Industries, Ltd. (2011). China Steel Sumikin Vietnam Joint Stock Company holds Its Ground Breaking Ceremony. Retrieved on June 22^nd, 2013 from the website: http://www.nssmc.com/en/news/ old_smi/2011/news2011-09-09.html/.

[17] Minh, P.(2013). "Ton Dong A: Huong toi canh tranh toan cau". Dien Dan Doanh Nghiep. Retrieved on June 22^nd, 2013 from the website: http://dddn.com.vn/20130426050238771cat238/ton-dong-a--huong-toi-canh-tranh-toan-cau.htm.