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Is there a future in trading steel online in Asia? Sure doesn't look like it if you pay attention to the Hong Kong stock market. There, GEM-listed iSteelAsia.com is trading at half of its April IPO price.
But that poor performance hasn't dissuaded a rival site, Asia-Steel.com. Founders Justin Chu, 47, and Danny Yim, 44, are both veteran steel traders, having worked for German giant Metalgeschellshaft. "We may be the last of the Mohicans -- the last generation of the old guys," says Chu, Asia-Steel's chairman. "We learned step-by-step: payment, shipment, insurance, international contract. It took five, six years of training."
Both Chu and Yim insist that the privately held Asia-Steel has a better chance of success than iSteeAsia.com. The reason? They insist they're not connected to any one major trader. "We are independent," says Chu. Besides, Timeless Software, another GEM-listed Hong Kong technology company, owns 10% of the company, and it does all the information-technology work for Asia-Steel. "We outsource everything -- that's the only way we save money," says Yim, who is also chairman of the Hong Kong Steel Traders Assn. "We don't have IT men in the company."
Asia-Steel already has more than 1,400 corporate members since debuting over the summer. It focuses on China -- a $38 billion market. And, Chu and Yim insist, the company doesn't accept individual members. That means you or I couldn't simply sign up, a tactic that Chu and Yim say rivals use to pad their membership numbers. "All of our companies are doing steel business," says Chu.
EYES ON CHINA. They're also not expecting to change the way Chinese trade steel straight away. But they recognize that they need to make the transformation from steel to cyberspace themselves. "In the old days," says Chu, "the Chinese would rely on us as the middleman. But the world is changing. We want to be the first ones to enter into this kind of market before they are fully changed."
The obstacles to developing the online steel trading business in China are huge. For starters, many would-be sellers don't even have access to the Internet, since they don't have computers. To solve that problem, Asia-Steel has given out over 1,000 computers to steel mills across the country. The company is 15% owned by Korea Data System, maker of the eMachine computer. So that helps ease some of the pain of handing out computers for free.
To help teach would-be customers how to use the service, Asia-Steel has eight offices in China with 60 people. "This is a long teaching process," says Chu. "We educate the users. We don't push them too fast. We do a lot of consulting work for them, how to buy, how to do international contracts."
"Especially in South China, they are not really computerized," explains Yim. "So there has been very much hand-holding that we are doing in the last few months. Our mission is to bring China into the 21st century."
MICRO MARGINS. The other mission, naturally, is to make money. To do that, Asia-Steel is dropping its prices. While traditional traders charge commissions of 1% or 2%, the company charges an average of just 0.25%. That means Chu and Yim will need to do a lot of volume. Their target is 10 million tons a year. Currently, the site does more than 200,000 tons. So there's still a long way to go.
But they say they have other revenue sources, too. The site has formed partnerships with shipping, insurance, and inspection services. Members can buy them cheaply online, and Asia-Steel shares the money with the service provider. "We can guarantee that it's the cheapest in the world," boasts Yim. Other services Asia-Steel plans to offer include a dispute-resolution service called echinalaw.com, which it hopes to begin in November.
For now, membership is free. But Asia-Steel figures to start charging between $300 to $500 next year. "For a steel trader, that's small money," says Yim. A subscription to one of the top trade journals, for instance, costs up to $2,000.
And while countless business-to-consumer sites in Asia are sinking because of the dearth of online advertising, Asia-Steel still is counting on industry ads, from the likes of logistics operators and steel mills. But Yim is realistic about what advertising can do. For now, the company is bringing in about $25,000 in ad sales -- "small money," says Yim. While he is hoping that aspect of the business will expand very fast, he concedes that "this is not the major revenue stream for us."
KEEPING COSTS DOWN. Given the hard times that Internet companies are facing, Chu and Yim are trying to be brave. Since they launched in July, they have done 14 transactions. That doesn't sound like much, but remember that this is B2B, so the number of sales is bound to be smaller than a consumer-oriented site. Those transactions have amounted to $53 million in trading volume. For Asia-Steel, that turns into transaction fees of $214,000.
And that, says Yim optimistically, "makes us break even," since the company's burn rate is around $200,000 a month. "We started traditionally," he says. "We knew that if you run a business, you can't burn money. So we controlled the budget very tight."
And what about going public? Given the dismal performance of iSteelAsia, the prospects for another Asian B2B steel site aren't very promising right now. But Chu claims that "we are not desperate for a listing." Having raised about $7 million from KDS, Timeless, and Mitsui, he says Asia-Steel is now self-financing. And it's looking to expand, opening in Indonesia and Taiwan soon and with partnerships already in place in Korea and the Philippines. In a tight market for all dot.coms, the company's steady approach might be just what it takes to survive.
Einhorn covers technology from Hong Kong for Business Week. Follow his Online Asia columns every week, only on BW Online Edited by Douglas Harbrecht
Copyright 2000, by The McGraw-Hill Companies Inc. All rights reserved.
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