Chinese Overcapacity Leads Saint-Gobain to Eliminate Product Lines

Amid growing price pressures in China, Compagnie de Saint-Gobain SA, the French abrasives manufacturer, has chosen to exit several product categories, instead of accepting lower margins, said Javier Gimeno, head of the company’s Asia-Pacific business.

Saint-Gobain no longer manufactures glass wool or architectural glass in China, Mr. Gimeno said in an interview with CFO Journal in Shanghai. “It is impossible to make money with these kinds of overcapacities,” he said.

Overcapacity among Chinese manufacturers have resulted in downward price pressures in these product categories, affecting margins.

Saint-Gobain now focuses on product classes it considers healthy, like plastics, automotive window shields and mortars.

“Making money here in China is much harder than in other Asian countries,” Mr. Gimeno said. “It is getting more complicated.” Nevertheless, the move — along with increased productivity has resulted in higher profit margins than in previous years, he said.

“My margins in China are better now than they were five years ago,” Mr. Gimeno said. Still, there is growing competition in the manufacturing sectors the company is now focused on.

Saint-Gobain targets operating profits in excess of 10% and wants its business in China to grow faster than the overall economy.

The Chinese economy grew by 6.7% in 2016, according to the National Bureau of Statistics. The government’s target for 2017 is 6.5%.

Saint-Gobain employs around 10,000 people in China. The firm’s 35 plants generate annual revenues of EUR 1.3 billion ($1.47 billion), Mr. Gimeno said.

Stricter enforcement of environmental regulations by Chinese authorities helps to fend off Chinese competition, he said. “In the past, Chinese firms were not subject to the same kind of standards in relation to environmental protection and to safety at work,” Mr. Gimeno said.

“These regulations cost us [foreign firms like Saint-Gobain] a lot of money”, he said. Now, domestic competitors are held accountable according to the same set of standards, Mr. Gimeno said.

The country’s Premier, Li Keqiang, last week pledged to create equal conditions — a so-called level playing field — for foreign and domestic companies operating in China, a step welcomed by Western executives, including the chief executive of Johnson Controls International PLC, Alex Molinaroli.

“The laws are getting tighter, more aligned with Western standards,” Mr. Gimeno said.

Still, the outlook for Saint-Gobain’s China business is positive, he added.

Restrictions on the overseas export of capital, for example dividends generated in China, are no longer an issue, Mr. Gimeno said. Introduced late last year, the controls initially caused concerns among multinationals. “Capital transfers take a bit longer now, but that’s all”, Mr. Gimeno said.

Foreign firms that want to transfer money outside of China no longer have to ask for approval, and need to notify regulators ahead of the transaction, said Marcus Wassmuth, head of European corporate coverage at UniCredit S.p.A. in Shanghai.

Capital controls limiting the overseas M&A-activity by Chinese firms however still apply, resulting in high-profile deals, including the acquisition of Dick Clark Productions Inc. by Dalian Wanda Group Co., to stall. China’s banking regulator is conducting a sweeping check of the borrowings of big overseas Chinese deal makers, including Dalian Wanda, the Wall Street Journal reported in late June.