Steel Industry Overcapacity,Vertical Integration And Enterprise Performance

The integration strategy is an important choice for enterprises in the process of its development in the face of challenges and opportunities,it can be divided into horizontal integration and vertical integration.Horizontal integration is merging in the same industry,while vertical integration is an extension of the enterprise along the industrial chain,the essence of which is to use the internal organization to replace the external market to meet the production and operation.The implementation of the integration strategy may not only affect the strength and performance of the enterlprise but also have a significant impact on the industry structure and development.Based on the review of context of the steel industry,this essay have a simple analyze of the integration strategy of listed steel enterprise,and made a demonstrate study of the impact of vertical integration on corporate performance.Firstly,the paper summarized research results of overcapacity and integration.Research on overcapacity mainly focused on the concept and measure of overcapacity and the its formation mechanism,noted that overcapacity is a relative concept and its usual measurement is capacity utilization,excess investment of government and enterprises and the low industrial concentration are important factors for the formation of overcapacity.Researches on horizontal integration is relatively less,which mainly focused on its impact on enterprise performance,and usually due to synergistic effect and cost effect.Vertical integration is a focus of the theoretical research,one of the interpretation of its motivation is scale economy of classic economics,another is asset specificity,asymmetric information and transaction cost of new institutional economics,which give help to the case analysis of steel enterprises.At the same time,the author have a review of others' work on empirical research of vertical integration,and notice that their measurements of vertical integration,such as inventory to sales ratio,which used in this paper.Secondly,the author had a glimpse of background of overcapacity in steel industry and possible causes,and then summarized integration of steel industry in China.The main motivations of steel enterprise's horizontal integration are exaggerate its scale and product lines,cut down outdated capacity and elevate value chains.Review on annual report of listed steel corporation find that vertical integration is popular among steel enterprises in China,the main cause of stretching backward is the specificity and uncertainty of resources,and the reason of stretching forward is to grasp market information and react better,and enter the realm of usage to elevate their place in the value chain.Finally,the writer had a demonstration on 27 listed firms from 2009 to 2015 with the fixed effect model to analyze the impact of vertical integration on corporate performance.The results are that during the seven years after global financial crisis,vertical integration had no significant affection on performance of listed companies,while total scale and asset liability ratio are significant,scale is positively related to performance and leverage is exactly opposite.That means steel firms should take the advantage of scale economy in the industry,and keep cautious about financial leverage to avoid over reliance on debt.It also indicates that restriction on low-scale outdated steel firm is really wisdom,the policy make should also know the limitation of vertical integration and be cautious about stretching along the industry chain.