U.S. President-elect Donald Trump vowed to bring more jobs back home during his campaign, especially from China. Here is one company he might start with: China’s largest and the world’s second-largest aluminum extrusion company: Zhongwang Holdings.
Currently, the company is under U.S. investigation for allegedly dodging import duties of as high as 374% through its U.S.-based subsidiaries. It’s said to have links to a stockpile of 6% of the world’s aluminum inventory at a factory in the Mexican desert.
Last month the U.S. Department of Commerce announced that a type of Zhongwang’s aluminum exports evaded U.S. antidumping restrictions, based on its preliminary investigation. A final determination will be announced next month.
“The determination has no impact on our sales and operations,” said Lu Changqing, president of Zhongwang, according to a press release on this matter. “We exported an insignificant amount of 5050 extrusions in response to customer requests between 2013 and early 2015, constituting less than 0.1% of our total sales over that period,” Lu explained, referring to the type of aluminum that’s under investigation.
This is not the first time Zhongwang faced a Commerce antidumping and countervailing investigation. In 2010 Zhongwang’s rapid growth in the U.S. caught the department’s attention. However, the case did not draw much attention back then.
In October 2015, the Aluminum Extrusions Fair Trade Committee and other petitioners tried again, urging Commerce to investigate Zhongwang’s “unfair” trade practices. Following The Wall Street Journal’s coverage of Zhongwang and the Mexican stockpile, and a strong push by other trade organizations, the petition succeeded this time. The Aluminum Extruders Council called the timing of these media stories “perfect” on its website. “With our fall conference located in Washington, D.C., we were able to take our case to Capitol Hill,” it said online.
Trump on China trade
Whether or not this is a case of transshipping and misclassifying to avoid high U.S. tariffs and duties on surplus Chinese aluminum, it adds tension to already strained U.S.-China trade relations in the aluminum business, where the U.S. is China’s largest export destination.
In recent years, China’s aluminum industry has been accused of being heavily subsidized by the government, hurting U.S. producers. Today, only two smelters are fully operating in the U.S., where eight smelters have either closed or been curtailed since 2015, according to The Aluminum Association. Direct aluminum industry jobs have dropped by nearly 60% to around 5,000 in three years. The other side of the story is that U.S. aluminum customers are benefitting from cheaper Chinese products, thus cutting their costs and possibly boosting their sales and creating more jobs.
Under the new Trump administration, U.S.-China trade relations face uncertainties because its trade policy toward China is not yet clear. During his campaign, Trump said he would slap a 45% tariff on Chinese goods and call China a currency manipulator from day one in the office. But the questions are: will he really turn this campaign rhetoric into reality, and how will China respond to the possible trade war?
“The facts prove that co-operation is the only correct way for China and the U.S.,” said Chinese President Xi Jinping during his call with Trump last month.
Zhongwang’s U.S. business
Zhongwang’s U.S. business has experienced ups and downs since its expansion in 2009, the same year the company was listed in Hong Kong. In 2009, U.S. revenue reached RMB 5 billion ($740 million), compared with RMB 214 million ($31.6 million) in 2008.
That rapid U.S. increase caught Commerce’s attention in 2010. Naming several Chinese aluminum extrusions companies, Commerce released findings on aluminum subsidization in China, and requested a response from Zhongwang. But the company did not respond.
In 2011 the company’s U.S. revenue plunged to RMB 404 million ($59.7 million). In its 2011 annual report it blamed Commerce’s countervailing duty investigation. However, it picked up again in 2012, reaching RMB 1.1 billion ($160 million).
The Aluminum Extrusions Fair Trade Committee’s petition includes a July 2015 report from Dupré Analytic, a low-profile company specializing in investigating Chinese companies. The report says Zhongwang’s success in building its U.S. business so fast is related to Zhongwang’s officially undisclosed global network in Mexico, the U.S., Vietnam and Malaysia, where some subsidiaries help to re-melt and export aluminum to the U.S. to allegedly circumvent duties. Zhongwang firmly denied all the allegations.
Mexico-based Aluminicaste Group and U.S.-based Perfectus Aluminum are two companies that may be under the control of Zhongwang Chairman Liu Zhongtian’s family. The report shows that the re-melt facility Aluminicaste, owned by Liu’s son, received Zhongwang aluminum shortly after its establishment in 2010. However, the slow process of re-melting aluminum created a stockpile at the facility, causing the U.S. government’s suspicion about the source of Zhongwang’s aluminum.
Back in 2014, a California aluminum businessman discovered a massive amount of aluminum when flying over a Mexican town in the Sierra Gorda mountains on a private jet. He took a picture of it.
It turned out that what he discovered was 850,000 tons of aluminum--6% of the world’s aluminum inventory. It did not take long to find out who was the mysterious owner—Liu Zhongtian. Jeff Henderson, who was the newly elected president of the Aluminum Extruders Council, was convinced that the aluminum was linked to Liu’s Zhongwang Holdings, according to The Wall Street Journal.
The report also says California-based Perfectus Aluminum is linked to Zhongwang. Perfectus was created from the merger of Peng Cheng Aluminum and Global Aluminum in 2014. Liu’s son serves as the president of Perfectus. This year Commerce started to probe a New Jersey-based factory, Aluminum Shapes LLC, which was owned by Peng Cheng and Global Aluminum.
Hong Kong-listed Zhongwang suspended its stock the day after the report was published last year. Shares dropped 18% once they resumed trading. In August 2015, the company issued an announcement--denying all accusations by listing 11 counterarguments and strongly condemned Dupré Analytic for causing the company financial losses in the stock market.
Zhongwang argued that these other companies that helped the company with overseas business are independent of Liu and Zhongwang. Five of these companies are Zhongwang’s suppliers and two are customers, it said.
On the transshipping through Mexico allegation, China’s Nonferrous Metals Industry Association stepped in, calling the accusations “strongly deviate from the truth.” Its response points out that, first, if the aluminum council is saying Zhongwang transshipped raw aluminum material, then Chinese companies would make little profit because the Chinese government levies a 15% tariff on exports. Second, if the council is saying Zhongwang transshipped aluminum products and is assuming that these products were from Zhongwang, based on World Customs Organization rules, paying tariffs on aluminum products is neither against Chinese or U.S. law.
This year the company has slowed down its U.S. expansion--its principal strategy is “focusing primarily on China and to a lesser extent on the overseas.” Based on Zhongwang’s 2016 interim report, 84% of company revenue came from China and 12% from the U.S.
The man behind Zhongwang
Once one of China’s youngest entrepreneurs, Liu, 52, was 14 when he started in the lumber business around Changbai Mountain at the beginning of China’s economic reforms. He worked in steel and the cement business shortly before moving to Hong Kong in the early ’90s. He earned his first big fortune in the city’s real estate market. In 1993 he founded Zhongwang Holdings, when he was 29. Today Liu lives in Liaoning Province, where Zhongwang’s headquarters are located.
Zhongwang is the second-largest aluminum extrusion company in the world, producing lightweight products for transportation, machinery and the electric-power engineering sector. In May 2009 the company launched the world’s largest initial public offering of that year, raising HK$9.8 billion ($1.26 billion). Owning 74% of the company’s shares and a net worth of $3.79 billion, Liu ranked No.8 on FORBES ASIA’s 2009 list of china’s richest. He is now worth $3.1 billion.
Some people say Zhongwang’s success is because of a bold transition in the early 2000s. He took a huge gamble on shifting from producing construction aluminum extrusions to industrial ones. That turned the small town of Liaoyang in northern China into the world’s leading aluminum-producing base.
Liu’s move seemed odd at the time. While Zhongwang was a top three producer in the construction aluminum business in China, the industrial aluminum extrusion business was hardly taking off. Disputes over the direction of the company led Liu to kick family members out. In 2002 he fired his brother Liu Zhongsuo and paid each family of his relatives RMB 5 million ($740,000) in exchange for their company stakes.
In an interview with Chinese news site SINA.com in 2009, Liu said: “You can give your family members money but you should not allow them to work with you.”
Betting that industrial aluminum was the future, Liu led his team to the U.S. on study trips from 2002 to 2004. He bought the world’s largest aluminum extrusion machine at that time, costing the company $3 billion and a large amount of financial stress from 2004-2005. In the end, Zhongwang’s transition into industrial aluminum extrusion products was a success, which led to the company’s IPO.
