It never ceases to amaze me what a mess politicians can make of business issues. Often the implications have a global impact far outside the limited issue they were trying to address. For example, the Chinese government has been trying to curb exports of basic steel products with repeated changes to the VAT rebates and export tax regime for the last year or more. To their credit, the removal of incentives and application of additional taxes has had a significant effect on reducing exports if not actually curtailing new investment in steel mills ” the stated aim of the exercise. On the plus side, domestic consumers of basic steel products will have seen fewer prices rises in their raw material than they would otherwise and enjoy shorter lead-times compared to overseas consumers.
So far so good, no harm done you may say. Well not quite. In India, the emerging auto parts producers are facing their toughest time in years just when the auto parts market both domestically and regionally is booming. Why? Because of the changes in China.
A recent article from an Indian publication details the double whammy facing producers of auto components in India.
On the one hand domestic Indian steel producers have pushed their prices up dramatically because their largest competitor, China now has to accommodate a 25% export tax into their prices. Consequently the Indian auto parts maker has to raise their finished parts prices to accommodate this increase in raw material costs.
On the other hand, the Chinese producers of auto parts are not facing any increase in export taxes because they are producing value added products which earn proportionally more foreign exchange and not surprisingly are exempted from export taxes by the Chinese government (makes you wonder if reducing investment fever is the only intent of the Chinese authorities). So Indian and regional automotive OEM’s are faced with the choice of stable pricing for Chinese auto parts (supported by a cooler domestic basic steel market) or Indian auto parts rising rapidly in cost. It doesn’t take Einstein to see the outcome.
Clearly China did not intend to have this specific effect on the Indian auto parts makers but it underlines how a change in one market can unintentionally be so damaging to another. Already Indian automakers are beginning to look regionally for their investment opportunities. It is rumoured that Tata is looking at Thailand as a regional base to make the new Nano. Now wouldn’t that be a sad indictment on the Indian manufacturing sector if Tata couldn’t competitively supply SE Asia from India?