Back in my days at Andersen, we used to have a saying, you get the behavior you incent to get. In other words, if a plant manager’s bonus correlates to productivity, cost reduction may go on the back burner, unless it enhances productivity. Perhaps one of the most famous cases of mis-aligned incentives involved Ross Perot. As a young IBM sales superstar, he had achieved his annual sales target by the end of the first quarter. He had asked his boss if he sold more, would he receive more pay. The answer? No. So he started EDS. With sales of $22b+ annually, you can say that taught IBM a lesson.
Unfortunately we see incentives misaligned all the time. But I digress. Yesterday, I caught an article on how Chinese steel producers have re-configured their export programs to take advantage of the new export tax and VAT rebate rules established by the government. These changes seem to occur quarterly as some changes went into effect January 1 and others went into effect April 1. Essentially, Chinese mills have been adding boron to crude steel to take advantage of a more favorable export tax / VAT rebate scheme for that product. The alloyed rebar (with the boron) receives a 13% VAT rebate and no export tax, vs. 5% previously. Regular rebar receives a 15% export tax, according to this story with no VAT rebate. The South Koreans raised the concerns, as China’s number one steel export market. South Korea has seen declines in rebar imports but massive increases (more than five-fold) for alloyed rebar, according to the Korea Iron and Steel Association.
This story offers up a few lessons for global metals buyers. The first, that both the Chinese government and the Chinese steel industry work in tandem ” the industry will exploit any and all opportunities to enhance exports so any poorly designed export tax and rebate scheme will have global effects. And second, this situation remains so fluid that the only type of sourcing strategy here involves opportunistic buying. Global buyers simply can not plan a long term program with this kind of government tinkering with the tax schemes. Now whether or not the Koreans will have an anti-dumping case remains to be seen.