Company Analysis: Globalization of China vs the United States - Research Paper Example

? Company Analysis: Globalization of China Vs United s Executive Summary The steel industry is one of the most important industries of the economy and is also considered as an important indicator of economy. It plays a major role in the development of overall economy and infrastructure. The application of steel is used in many industries such as construction, automobiles, machinery, transportation, and many others. The global steel output was over 1547 million tons for the year ending 2012. The steel industry has experienced superior growth during the last two decades but after the global financial crisis, the industry suffered sluggishness in demand. US Steel Corporation, established in the year 1901, is one of the biggest integrated domestically owned steel companies of US. The company’s customer base is diversified in global markets including Central Europe and Canada. It was declared as the 13th largest steel producing company in the world in the year 2010. The globalization of industries in US is expected to increase the profitability of the company in future due to growing demands in the emerging economies such as China. Baosteel, established in the year 1978, was declared as the 2nd largest steel producing company in the world in 2011 and has demonstrated excellent performance in recent years irrespective of slowdown in demand in the global market. From the financial statement analysis of the US Steel Corp. it can be said that US Steel’s production capacity exceeds its total sales leading to unsold inventory. Steel sector is already a cyclical sector in the sense that the demand for the steel products vary in every quarter. Globalization in China in expected to help the company in diversifying its products into other economies. In addition, the company’s mass production will help it to reach economies of scale in future that will further help to export steel at cheaper rates making US domestic steel industry more competitive. The study aims to analyze the financial statements of the two companies and provide a comparative analysis by highlighting key areas of concern, impact of globalization in US and China and recommend steps that should be taken to ensure profitability in competitive environment. Introduction The steel industry is one of the most important industries of the economy and is also considered as an important indicator of economy. It plays a major in the development of overall economy and infrastructure. The application of steel is used in many industries such as construction, automobiles, machinery, transportation, and many others. The global steel output was over 1547 million tons for the year ending 2012. The most important characteristics of the steel industry are that it is cyclical and highly fragmented. The steel industry has experienced superior growth during the last two decades but after the global financial crisis, the industry suffered sluggishness in demand. In order to manage operating risk, many companies have diversified their operations in emerging economies where the demand of steel was not affected by global recession. Company Analysis Baosteel Group Corporation Baosteel Group Corporation (also known as Baosteel) is one of the iron and steel largest company of China. It was established in the year 1978 and its head quarter is in Shanghai, China. It is the world’s 2nd largest steel producer following ArcelorMittal in terms of aggregate output. In the year 2012, the company was awarded 197th rank in Fortunes Global 500 for ninth consecutive year. It was also rated by Fitch, S&P, and Moody’s as A3, A, and A- respectively in the same year. Baosteel was also identified one of the most admired company in the world. The company primarily operates in the iron and steel industry and produces high quality steel that adds value to other industries. The main products of the company are stainless steel, special steel and carbon steel. The company reported approximately 44.2 million tons that helped it to earn over RMB 18.10 billion. Hence, it was ranked as the second largest steel producer in the world. The company’s presence is not limited to domestic market and after globalization, Baosteel exports to countries including America, Europe, South Korea, and Japan. The company’s products are widely used in industries like energy, transportation, machinery, automobile, aviation, electronic instruments, home appliances, etc (Baosteel, pp.3-4). United States Steel Corporation The United States Steel Corporation (also known as US Steel) is the 13th largest steel producing company in the world. It is a global steel producing public company headquartered in Pittsburgh whose shares are traded in New York Stock Exchange. The company was a component of Dow Jones Industrial Average during the 90s but was later removed by renaming USX corp. with Navistar International. The company’s primary products include Tubular steel and flat-rolled iron which constitutes a major portion of the company’s revenue. The company also operates in Canada and Central Europe. The company’s annual steel producing capacity is approximately 29.28 million tons. The company’s steel production serves as inputs to other industries and adds value to wide range of industries including industrial machinery, oil and gas, construction, container, automobiles, appliances and utilities. The company operates in an integrated facility that includes some of the big names in industry such as Gray Works, Edgar Thomson, Irvin, East Chicago Tin, and so on. From the company’ annual report it can be said that it prides itself as a leader in product technology and innovative process. The company has four R&D centers that works dedicatedly to implement new and innovative steel producing process that will reduce cost of operations and help achieve economies of scale. In the year 2010, company has invested billions of dollars to upgrade technology and software required in operations which resulted in negative operating profit and net profit (United States Steel Corporation, pp.11-16). Financial Statement Analysis Horizontal Analysis US Steel Corporation As depicted by the Income Statement, United States Steel Corporation has suffered loss in the years 2011 and 2012, which is noticed to be a carry forward from 2010. This may be due to investment of $100millions to upgrade software programs throughout their manufacturing facilities in 2010. Though in the year 2011 the company was able to reduce a maximum part of the loss incurred in 2010, it failed to perform so in 2012, as the loss incurred in 2012 has increased as compared to 2011. A part of the loss has resulted as a result of the decrease of sales in 2012 by 2.8% as compared to 2011. Though the expenses incurred in the year 2012 were much less than that incurred in 2011, i.e. a decrease of 2.74% than the previous year, yet a higher decrease in the value of sales have resulted in a greater loss. Interest cost in 2012 has increased by 12.63%, which adds to increase in the total financial cost. Income tax provision has increased by 63.75% in the year 2012, as compared to 2011. The increase in interest expense and income tax provision has further led to the decrease in revenue, which has resulted in increase in net loss. As a result of net loss, the shareholders have suffered loss on the earnings per share of 0.49 in 2012 as compared to 2011. The position of assets and liabilities has decreased by 5.33% in the year 2012, as compared to 2011. The decrease in liabilities has a positive effect on the performance of a company, but decrease in assets affect the performance of a company adversely. Though the position of cash has increased in the year 2012 as compared to 2011, yet the total value of current assets have decreased in 2012 as compared to 2011. Total receivables earned in 2012 have decreased by 14% from 2011. In 2012, sales was subject to a greater amount of allowance of $64 as compared to $55 in 2011, which led to further decrease in the revenue earned from sales. As compared to 2011, the company’s investment and long-term receivables have decreased by 10.83%, property, plant and equipment have decreased by 2.6%, intangibles and benefits earned from deferred income tax have decreased by 3.44% and 34.67% respectively. The company has earned non-current assets and goodwill in 2012, as they have increased by 8.28% and 2.19% respectively. The increase in the value of goodwill can be apportioned to be the result of better strategic decisions taken by the management of the company. It can be expected that increase in the value of goodwill will benefit the company in the future and will help it to revive from its losses. The decrease in liabilities is as a result of decrease in current liabilities by 18.06% and total liabilities by 6.63%. The decrease in current liabilities is due to decrease in total payables to creditors by 12.75%, outstanding bank checks by 37.5%, payroll and benefits payable by 2.59%, short-term debt by 90% and borrowings by 100%. Though accrued taxes, accrued interest, and long-term debt have increased by 23.73%, 21.95% and 2.82, yet the decrease in the dues of the company have helped to meet the increased expenses. Deferred credits and employee benefits have also reduced by 19.8% and 4% in 2012. Decrease in shareholders equity have resulted due to decrease in retained earnings, as because due to net loss earned from operations the company could not retain and to meet some cost a part of the retained amount had to be used. The company has also not issued any new shares in the year 2012. Baosteel The revenue earned by Baosteel in the year 2012 has decreased by 0.14% as compared to 2011. The decrease in total revenue is primarily due to decrease in revenue earned from principle operations. As compared to decrease in revenue, cost has not decreased by the same percentage. Total cost incurred by the company has decreased by 0.12%. This low reduction in cost as compared to revenue is due to a marked increase in financial expense and loss from asset devaluation. Income from investment has increased during the period by 0.93%. Share of net profits from joint ventures and associates have also decreased during the period by 0.20%. Thus, the profit arising out of operations have decreased by 0.59% as compared to 2011. Inspite of decrease in operating profit, the net profits earned by the company has increased by 0.34%, which is due to increase of non-operating income by 15.25% in 2012. As a result of increase in the net profit, the profit attributable to equity shareholders of parent has increased by 0.41% and earnings per share have increased by 0.43%. The balance of cash has decreased in the year 2012 by 0.39% as compared to 2011. This may be due to the payment of current liabilities. The portion of total current assets has decreased in 2012 by 0.12%. This is due to the decrease of value of almost all current assets except accounts receivable which have increased by 0.22%, interest receivable by 79.67% and current portion of non-current assets by 9.08%. The total assets as on 2012 have also decreased by 0.07% as compared to 2011. This decrease results due to decrease in current assets and total long-term assets by 0.05%. Though the value of Long-term receivables and other long-term assets have increased by 657.52% and 119.54%, yet the decrease in other assets have led to the decrease in the value of total assets of the company. Decrease in total liabilities has been a result of decrease of most short-term and long-term liabilities, except borrowing which has increased by 1% as compared to 2011. Tax payable has been noticed to undergo a marked decrease of 2.25% in 2012. Decrease in liabilities not only brings about improvement in the business operations, but on the other hand it helps to increase the goodwill of the company as the company attempts to meet its dues timely. Shareholder’s equity have increased by 0.03% due to increase in reserves and retained earnings, which results due to positive profits of the company. But as a result of decrease in liabilities, the total value of shareholder’s equity and liabilities have decreased. Vertical Analysis US Steel Corporation The proportion of expenses on total sales in the year 2012 has decreased as compared to such proportioned expense incurred in 2011. The expenses incurred are apportioned between cost of sales and selling, general and administrative expenses. The proportion of cost of sales and selling, general and administrative expenses in the year 2012 is 91.21% and 3.38%, which is lower than 92.16% and 3.69% in 2011. Due to decrease in assets, the cost of depreciation, depletion and amortization has decreased, but due to decrease in sales the proportion of such cost on sales remains constant. Income received from investees has increased by 0.32% and other income by 0.03% in 2012. The proportion of income earned from operations in 2012 on sales is 1.28%, which is less than 1.33% in 2011. The proportion of income earned before income tax and non-controlling interest on sales in 2012 has decreased from 2011, which has also led to the rise in net lose to 0.65% in 2012, as compared to 0.27% in 2011. Since the value of total assets have decreased in 2012, so the proportion of different assets on total assets have shown a mixed variability. As compared to the previous year, some assets have shown an increase, e.g. cash, some assets have shown a decrease, e.g. investments, whereas some assets have shown a very slight decrease in proportion, inspite of a quantified decrease in the total value, for e.g. receivables, intangibles. As a result of decrease in total liabilities as compared to previous year 2011, the proportion of different other liabilities on total liabilities has decreased, except for few, for, e.g. long-term debt, etc., which have increased. The company has not issued any new stock in 2012, yet the proportion of common stock on total liabilities has decreased due to decrease in total liabilities. Baosteel As compared to revenue earned from principle operations, the total cost incurred on principle operations as a proportion of total revenue have increased as compared to 2011. The proportion of operating profit as a proportion of total sales has decreased from 3.97% in 2011 to 1.88% in 2012. This may be due to the decrease in sales. As the proportion of total profits on total sales have increased in 2012, i.e. from 4.16% in 2011 to 6.86% in 2012, so income tax as a proportion of total sales has also increased from 0.68% in 2011 to 1.41% in 2012. Inspite of increase in income, net profits has increased, and net profit calculated as a proportion to total sales has shown an increase from 3.47% in 2011 to 5.45% in 2012. Thus it resulted in increase in net profit attributable to equity holders of the parent and earnings per share. The proportion of different assets on total assets in 2012, as compared to 2011 has shown a mixed result. The proportion of some assets on total assets i.e. cash, long-term and accounts receivable, etc. has decreased in 2012 as compared 2011. The proportion of some assets i.e. notes receivables, loans and advances to customers, financial assets available for sale, deferred income tax assets, etc on total assets, have not shown any change. The proportion of some assets i.e. inventories, intangible assets, etc on total assets, have decreased as compared to its proportion in 2011. The proportion of liabilities on total liabilities also depicts a mixed picture when compared with its proportion held in 2011. Short-term loans and accounts payable carry a maximum portion of the total current liabilities, and total current liabilities carry a maximum portion of the total liabilities. Reserves, retained earnings and equity attributable to the shareholders occupy a major portion of the total shareholder’s equity, as increase in retained earnings and equity is due to the positive profits earned by the company. Ratio Analysis US Steel Corporation Baosteel Performance Comparison between Baosteel and US Steel Corporation The analysis of the ratios of United States Steel Corporation (USSC) and Baosteel for the year 2012 shows that since USSC has not made any profit in 2012 and 2011, so there is no difference in their profitability ratios, as only the gross profit margin has shown an increase of 0.01. Whereas the profitability ratios of Baosteel have undergone a change, as the ratio of gross profit margin and operating profit margin has decreased by 0.02 and Return on assets and net profit margin has increased by 0.02. The solvency ratios of USSC have increased in the 2012, whereas such of Baosteel has decreased in 2012. A company with solvency ratio greater than 20% is considered to be financially healthy and having less probability of being default of its debt obligations. Thus, USSC can be considered to be in a more stable condition than Baosteel. On analysis of the liquidity ratios, USSC can be considered to be under a more liquid state than Baosteel, thus USSC’s probability to meet its current liabilities is better. Due to net loss acquired from operations by USSC, the return ratios of the company are negative, whereas that of Baosteel is positive, as its profits have increased in 2012. Comparing the statement of operations of USSC and Baosteel as on 2012, it can be said that where on one hand USSC has suffered a net loss of $125million in 2012, Baosteel has earned a profit of RMB10432955669, which is 0.35% increased than 2011; whereas the net loss of USSC has increased by 135.85% from 2011. The EBT of USSC has decreased by 77.77%, whereas EBT of Baosteel has increased by 0.35%. From the horizontal analysis it is noticed that the decrease in net sales, cost of sales and EBIT from 2011 is greater in USSC than Baosteel. In 2012, the EPS of USSC is negative i.e. (0.86), whereas of Baosteel it is positive i.e. 0.60. Comparing the consolidated balance sheet of USSC and Baosteel, it can be said that the cash position of USSC is in a better state than Baosteel, as in 2012 cash of USSC has increased by 39.71% whereas cash has decreased by 0.75% in Baosteel. In 2012, the total assets and total liabilities including stockholder’s equity of USSC has decreased by 5.33%, whereas that of Baosteel has decreased by 0.07%. In 2012, current assets and current liabilities of USSC have decreased by 6.93% and 18.06%, whereas that of Baosteel has decreased by 0.12% and 0.13%. The value of shareholder’s equity of Baosteel has shown a growth of 0.03%, whereas that of Baosteel has not shown any growth due to net loss incurred. Public Perceptions and Recent Results US Steel Corporation, established in the year 1901, is one of the biggest integrated domestically owned steel companies of US. The company’s customer base is diversified in global markets including Central Europe and Canada. It was declared as the 13th largest steel producing company in the world in the year 2010. For the year ending 2012, the company reported total revenue over $19.88 billion. As on 2012, the total assets of the company were reported over $16 billion and a total equity of over $3.85 billion. The company reported a net loss of $125 million for the year ending 2012. Baosteel, established in the year 1978, was declared as the 2nd largest steel producing company in the world in 2011 and has demonstrated excellent performance in recent years irrespective of slowdown in demand in the global market. For the year ending 2012, the company reported a total sale of over RMB 191 billion (approx. $31.23 billion) with net profit of over RMB 10.4 billion (approx. $1.7 billion). The company reported total assets over RMB 21.43 billion (approx. $3.49 billion) and total equity over RMB 11.73 billion (approx. $1.91 billion). The current exchange rate of RMB and USD is one RMB equals approximately 0.163 USD. Conclusion and Recommendations The steel industry has suffered slow growth after the global financial crisis mainly due to lack of demand in other industries. The automobile, construction, machinery, consumer durables, and all other production sectors were affected leading to low demand of steel in the developed economies. This is mainly because the final product in steel manufacturing process serves as inputs to others industries. During the research it was found that Baosteel was the identified as the second largest steel producer in the world in terms of output. Baosteel has also diversified its operations in other economies to expand its operations and reach global customers. Also from the research it was found that the major source of revenue of US Steel is Central Europe and United States. The Euro-zone crisis has affected the company’s balance sheet by reducing the net profit available to shareholders during the previous two years. It was also found that in the year 2010, US Steel has spent billions of dollars in upgrading its technology and software which is also one of the reasons as to why the company reported losses in the previous two years. The Chinese pioneer in steel industry, Baosteel has been one of the biggest threats of competition for US Steel during the last three years or so. The cheaper imports from China have increased the competition of the domestic steel maker. Furthermore, the company is also burdened with excessive inventory due to cheaper imports of steel from other emerging countries like China. From the financial statement analysis of the company it can be said that US Steel’s production capacity exceeds its total sales leading to unsold inventory. Steel sector is already a cyclical sector in the sense that the demand for the steel products vary in every quarter. In addition, the instability of Euro-zone has affected the demand adversely leading to operating losses. In such a scenario it is recommended that the company’s management must adapt cost reduction strategies and at the same time also focus on efficient production system to as increase profitability and reduces losses in future. In contrast, the performance of Baosteel has been quiet impressive as the management of Baosteel has adopted an excellent strategy to expand its operations and diversify its business into other economies. The company’s production process is efficient and has been able to increase the scale of production to second spot in the world. In short it can be said that although the demand for steel has been slow during the previous three years but now after the US Federal’s quantitative easing the demand is expected to grow by 2015. In such case it is very important for both the companies to increase their production level and also reduce their cost of operations. The management of both the companies is advised to adapt cost reductions strategies since in order to survive the stiff competition the companies must take their production output to a new scale. This will in turn help the companies to reach economies of scale that will further help them to price their products and services at cheaper rates. In the coming years low cost model is expected to boost economic sentiments and improve demand in the market. Work Cited Baosteel. Annual Report 2012. 2012. Web. August 02, 2013. < http://tv.baosteel.com/ir/pdf/report/600019_2012_e.pdf>. United States Steel Corporation. 2012 Annual Report and Form 10-k. 2012. Web. August 02, 2013. . ebooks.narotama.ac.id. n.d. Financial Statement Analysis. Pdf. August 03, 2013. . Lynch, Merrill. 2000. How To Read A Financial Report. Pdf. August 03, 2013. . Read More