Emerging Markets, companies, Don't be afraid to invest in them - a steel mill moved from Germany to China

CHINA TAKES THE RUHR
by Chris Mayer

The Ruhr Valley was the heart of Germany’s industrial might. For more than
200 years, the smokestacks in this northwest corner of Germany pounded out
the steel and iron that would form the backbone of the nation’s industry.
And when the war drums rumbled, these factories supplied imperial Germany
with its field guns, armored tanks and shells.

Prosperous communities grew up around these old blast furnaces and mills.
People took pride in the stuff they could make with their hands. Tens of
thousands found work in the factories of the Ruhr. Generations passed with
the knowledge that their sons and daughters could make a life here and
carry on the legacy of such a place. For a long time, that was the way it
went.

But the winds of change patiently grind away at even the most impressive
of advantages. In the early 1990s, the industrious workers of Asia powered
the mortar and pestle that would crush the Ruhr’s traditional way of
life.

It was a slow process, but the endgame was not hard to see. While the
South Koreans became the most efficient producers of steel in the world,
German workers were agitating for a 35-hour workweek. While the Chinese
worked all day in their mills and new factories sprouted up like spring
peepers all through China, Germany increased taxes and expanded its
bloated government programs.

By the turn of the millennium, no one could ignore the stark reality any
longer. The mills and factories of the Ruhr started to close - forever. In
his terrific book China Shakes the World, James Kynge tells the story of
ThyssenKrupp’s steel mill in Dortmund, one of the largest in Germany. The
Germans called it the Phoenix, inspired by its rise from the ashes of
bombing raids in World War II.

Within a month of ThyssenKrupp closing the mill, a Chinese company bought
it with the idea of disassembling the entire mill and taking it to China,
near the mouth of the Yangtze River. Soon after this Chinese company
bought the mill, 1,000 Chinese workers arrived in Germany to begin the
process of taking the plant apart and bringing it to China.

The Germans got an up-close lesson in why they could not compete. The
Chinese worked seven days a week for 12 hours a day. The Germans started
to complain. So the Chinese, in deference to local law, took one day off.

In the end, the Chinese dismantled the mill in less than one year - a full
two years ahead of the time ThyssenKrupp initially thought it would take.

When the Chinese departed, they left the makeshift dormitories and
kitchens they occupied for a year neat and clean. There was, however, a
single pair of black boots left in one of the dormitories. The boots
carried the brand name Phoenix, which was the same name of the plant the
Chinese just took apart. The boots also carried the label “Made in China.”
Kynge writes, “Nobody could tell, however, whether the single pair of
forgotten boots was an oversight or an intentional pun.”
Over 5,000 miles away, the Chinese rebuilt the steel mill exactly as it
was in Germany. As Kynge writes: “Altogether, 275,000 tons of equipment
had been shipped, along with 44 tons of documents that explained the
intricacies of the reassembly process.” Doing all of this was still
cheaper - by about 60% - than building a new mill. Plus, in China, the
demand for steel was such that the mill could start producing steel
immediately at full capacity.

As recently as 1975, China’s entire output of steel could not match this
one mill in Dortmund. Now, the Dortmund plant itself stands in China. And
in Germany, you have a dying industrial city, unemployed steelworkers and
the scarred earth where the mill once stood. Germany is thinking of
turning the site into parkland and perhaps creating a lake and marina. But
as one burly steelworker says in Kynge’s book: “Do we look like yachtsmen
to you?”

This remarkable vignette captures, on many levels, how the game has
changed. Comfortable workers in the factories and mills of America and
Western Europe have no idea what they are up against. Even so, the nature
of global competition keeps shifting.

We tend to think of emerging markets, such as China, as occupying a place
down on the food chain of the global economy. We tend to think of these
places as sources for cheap labor and natural resources. But more and
more, these emerging markets are home to world-class companies in all
kinds of industries.

This is the thesis of Antoine van Agtmael, author of a new book called The
Emerging Markets Century. Agtmael is the man who coined the phrase
“emerging markets” to describe growing, but less-developed economies such
as China, India, Brazil, Argentina, Mexico, Thailand and other places.
Before him, we called these markets “third-world” - which brings to mind
many negative associations. To sell the idea, Agtmael came up with
“emerging markets.”

I saw Agtmael give a presentation in Washington, D.C., one evening. I’ve
also since read the book. Agtmael spent 30 years in these kinds of
markets. “I have helped IranAir lease airplanes and hire crews in
Ethiopia, was involved in financing Ghana’s cocoa exports,” he writes,
“and grew wise to the ways - many of them laughably one-sided - that
developed nations interacted with what were in many cases recent European
colonies.”

Agtmael selected 25 companies to profile in his book. All of them
exemplify best practices and are widely recognized as leaders in their
industries. All of them call an emerging market home.

Agtmael writes about spending time in High Tech Computer Corp.’s research
lab in Taiwan in 2005 and how “Suddenly, my BlackBerry looked like a Model
T.” He writes about how the regional jets we fly are made in Brazil (by
Embraer). How computers are now not just made in China, but designed
there. How Indian and Slovenian labs produce proprietary new drugs. And on
and on it goes.

The world has changed in a profound way, but the typical investor probably
doesn’t appreciate this fully. One more nugget from Agtmael: In 1988, when
he started his fund, there were only 20 emerging market companies with
sales of more than $1 billion. Most of these were banks or commodity
companies. (Overwhelmingly, they were located in Taiwan.) Today, there are
over 270 companies with over $1 billion in sales, and 38 with more than
$10 billion.

Many of them are high-tech companies or provide consumer products and
services. This bolsters Agtmael’s point that many of today’s emerging
market stars do not rely on cheap labor, abundant natural resources or
protective government policies. Instead, they have developed competitive
advantages in technology, design, logistics and other areas.

Agtmael also gives his tips for investing in emerging markets. The most
important of these may simply be this: “Don’t be afraid to invest in
them.”