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SHANGHAI ? If you want to see ways that a Nebraska company can make money from China's infrastructure spending boom, just look up.
At the decorative street lights lining a downtown Shanghai shopping street.
At the sturdy pairs of steel support poles, each as big around as a mature tree, holding up numerous electrical power lines.
At the thousands of symmetrical lights curving gently over miles of a new elevated highway near one of Shanghai's two modern airports.
Each of those poles has contributed to profits earned by Omaha-based Valmont Industries, which posted $148?million in sales last year in China. And as China continues to spend billions of dollars annually on massive infrastructure projects, Valmont officials are confident that they can sell lots of additional poles in the future.
?When you are not in the pole business, you never notice how many poles there are,? said Huang Xiao-yong, president of Valmont's China operation. ?But there are poles everywhere.?
Poles for lights, signs, power lines and cellphone towers accounted for a large share of Valmont's China sales, although the $148 million figure also includes the company's irrigation systems and metal handrails and walkways for industrial plants.
Valmont's business dovetails nicely with some of China's infrastructure spending, which includes highways, bridges, airports, deep-water shipping ports, subways, high-speed rail lines, power plants, hydroelectric dams, refineries, schools, electric power grids and cellphone networks.
?China has long been the world's largest investor in infrastructure, building roads sometimes even before the towns that they will eventually serve exist,? an International Monetary Fund report said this year.
The Chinese government began to accelerate infrastructure spending in 1998, said Shuanglin Lin, an economics professor at the University of Nebraska at Omaha. China needed to upgrade its transportation, communications and energy systems in order to make the country more modern and support its growing export business.
?The demand for infrastructure is high,? said Lin, who also heads the China Center for Public Finance at Peking University in Beijing.
In addition, he said, the spending has helped create jobs and keep the Chinese economy moving, even as the world economy has slumped.
For example, China this month approved more than 20 local infrastructure projects worth more than $150 billion to boost the economy. China's growth rate had dipped to 7.8 percent in the first half of 2012 ? low by recent Chinese standards, although it's much better than the U.S. economy.
Valmont is poised to take a slice of that spending, with five company-owned factories in China that serve the local market as well as other Asian nations and Australia.
While China sales alone accounted for a relatively small fraction of Valmont's total revenues of nearly $2.7 billion last year, the company's success there points to future opportunities elsewhere in the developing world.
In all, Valmont already does 45 percent of its business outside North America, up from 25 percent a few years ago.
?You look at the developing world and you see they need everything we produce,? said Terry McClain, senior vice president and chief financial officer at Valmont.
Valmont and its CEO, Mogens Bay, have worked with China for a long time.
In the 1970s, Bay was the China representative for the East Asiatic Co., a Danish firm involved in shipping, industry and trade. While there, he met Valmont founder Robert Daugherty, who had come to China to sell irrigation systems. Soon Bay joined the Nebraska company, eventually rising to the top position in 1993.
A few years later, Valmont built the first of its Chinese factories on the undeveloped outskirts of Shanghai. When the plant began producing poles in early 1996, there were no nearby businesses. Instead, there was a rice paddy across the street, and sometimes half of the roadway was covered with grain that the farmer had spread out to dry.
Sixteen years later, the Songjiang Industrial Area surrounding Valmont's factory is a microcosm of the changes that have turned China into the world's largest manufacturer. The former rice paddy now holds a factory for Pierre Cardin products. Nearby, there's a huge complex for a Taiwanese manufacturer of laptop computers, including enough worker dormitories to house a college full of students.
Initially, Valmont owned 70 percent of the Shanghai factory, where long steel plates are bent and welded into tubes. The remainder was held by Shanghai Steel Shaped Tubing Co., but the Nebraska company has since bought out its Chinese partner.
Valmont's factory differs from most of its neighbors because it isn't designed to use cheap labor to ship products back to the U.S. Nearly everything the plant makes is sold to customers in China or nearby countries.
The same is true of Valmont's other Chinese factories: two additional pole plants, another that makes irrigation pipe and related structures, and one that fashions metal ?access systems? such as ramps and catwalks. The latter factory was acquired in 2010 when Valmont bought Delta PLC.
Valmont has moved slowly in growing its business in China, McClain said.
?We go in and plant seeds,? he said, ?rather than make major bets.?
Occasionally, McClain said, Valmont doesn't have enough capacity in its U.S. plants to handle an order of utility poles destined for North America, so the company uses one of its Chinese factories to make some components for those poles and ship them to the U.S. for assembly. The alternative, he said, would be to refuse the entire order ? hurting job prospects in the U.S.
Meanwhile, he said, Valmont needs to have factories in China in order to make sales there, partly because the Chinese government often mandates locally made products. In addition, he said, it would be cost-prohibitive to ship heavy steel poles and irrigation pipes from, say, the Valmont factory in Valley, Neb., across the Pacific Ocean.
Some poles are about 10 feet in diameter and 250 feet high.
There's also an advantage to having company engineers based in China when they are determining the load requirements of poles for a specific location in China, McClain said.
?You have to be local to make the products,? he said. ?We just view Valmont as a global company. We have to be global.?
For irrigation systems, Valmont makes the pipe and steel structures in China for the Chinese market, but produces gearboxes and sophisticated controls in the U.S. That means irrigation pivot sales in China create some jobs in Nebraska, although Valmont officials were unable to estimate the number.
Similarly, Valmont said it could not quantify how many jobs in the company's Omaha headquarters can be attributed to pole manufacturing in China or other foreign countries. But McClain said there is obviously some impact.
?Whenever we get more sales in China, we create employment in the U.S.,? he said.
Valmont officials acknowledge that they face tough competition in the pole business from Chinese rivals. Huang, the company's China president, maintains that the company's products beat the competition because Valmont uses better quality steel, better galvanization and better engineering design. But that doesn't always win the contract.
Arnold Ursaner, a financial analyst who studies Valmont, said the company is most successful on major projects, such as the tallest utility poles installed in the trickiest locations.
?In China, Valmont does well on larger products with higher engineering content,? said Ursaner, president of CJS Securities in White Plains, N.Y. ?On smaller projects with less engineering, the markets are highly competitive.?
Valmont officials agreed with that assessment, noting that they typically win contracts based on their reputation for high quality poles that remain standing during hurricanes and other disasters.
In early 2008, Huang said, ice and snow storms wreaked havoc on some power transmission lines in the northern part of China, but no Valmont pole was damaged.
?We've never had a pole fall,? Huang said.
McClain said Valmont is mindful of the need to protect the company's intellectual property ? the technology that has been developed in the U.S. and may give Valmont products a market advantage.
China doesn't have an established track record on respecting intellectual property, he said. Nor are commercial contracts honored as much as they are in the U.S. legal system.
Those aren't insurmountable challenges, McClain said, but they are issues that the company must face.
?You have to make sure that's respected locally,? he said.
Valmont also could be affected if China's economy keeps slowing down, despite recent efforts by central and local governments to prime the economic pump with infrastructure spending.
Ursaner said any slowdown in China's economy could ripple across Asia, which also could affect Valmont operations in other countries in the region.
Lin, the UNO professor, said it's obvious that the extra Chinese government spending is needed to stimulate the economy, given lagging Chinese exports to Europe and the U.S. At the same time, he said, China is struggling with rising government debt to pay for the infrastructure work even as social welfare spending is going up.
?Debt is a problem,? he acknowledged.
Even so, Lin said, China has enough important infrastructure needs that high spending is likely to continue at least for another decade despite concerns about the debt burden.
McClain said Valmont should be able to find ample markets for products like power poles in China and throughout the developing world, because those nations still need to build electrical power systems.
About 1.6 billion people worldwide ? one out of five people ? have no electrical power at all and will be looking to obtain it eventually. And Valmont is poised to do its part.
Contact the writer:
402-444-1114, paul.goodsell@owh.com
Source: http://www.omaha.com/article/20120923/MONEY/709239939
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