European ‘Anti-Dumping’ Investigation Could Mean 30% Duty on Chinese Alloys

While everyone has been focusing on the US-initiated anti-dumping tariffs against Chinese-made passenger car tyres, another anti-dumping investigation has escaped widespread coverage. On 13 August 2009 the European commission began an investigation into dumping allegations made against Chinese wheelmakers who allegedly sold products into the European markets beneath cost price. At the time 60 Chinese wheelmakers received notification of the impending investigation and most reportedly began cooperating straight away. Nevertheless, according to China’s Ministry of Commerce, the investigation is likely to cost Chinese wheel exporters an estimated US$390 million. There is still a chance that no tariffs will be implemented, but if they are they will apply across both the OE and replacement sectors and are predicted to be lie somewhere around the 30 per cent mark.

The European Commission’s investigation, which began just a day after the Chinese companies involved were informed of the allegations, followed a complaint made by the Association of European Wheel Manufacturers’ (EUWA) in June 2009. At the time the journal of the executive arm of the 27-nation European Union said the investigation was initiated “having determined that there is sufficient evidence to justify the…proceeding.” However, China's Ministry of Commerce denied the charges saying: “It raises the cost of repairs for customers, affects the recovery of the European auto sector from the global financial crisis, and hurts the interests of both China and Europe.” Either way, with Chinese produced wheels representing a significant proportion of replacement market products on offer, any kind of trade barriers that are implemented are likely to have a similarly significant effect on the shape of the market.

Trade Barrier or Field Leveller?

Seven months in, the investigation is scheduled to run according to a predetermined timeframe. Following its initiation back in August 2009, the 60 Chinese companies involved were required to return questionnaires and disclose data relevant to the investigation. The next step, which forms part of the so-called provisional stage of the investigation, will see the commission impose the provisional measures that it deems necessary on 12 May 2010. This will be followed by the return of comments on disclosure up to this point on 2 June, further ‘definitive’ stage comments on 19 July the final announcement of any definitive measures on 12 November 2010 – more than a year after the initial investigation began (see table for summary of this information).

Speaking to Tyres & Accessories, a European Commission spokesperson explained that investigations are “always prompted by a well-founded complaint by industry – the commission then assesses the complaint and decides whether an investigation is warranted” but refused to give further details. And with regard to the question of what exactly is likely to come of the investigation, the spokesperson was similarly opaque, adding: “We cannot speculate on whether or not measures might be imposed or what they might look like.”

EUWA aiming for a level playing field

From the European industry’s perspective Chinese wheel manufacturers have been unfairly supported by systems initiated by the Chinese government. The situation is said to be so bad that failure to act, says European Wheel Manufacturers Association (EUWA), could result in the European wheel manufacturing being dented beyond repair, as we have already seen in the US. Nevertheless the association maintains that its complaint has never intended to be a trade blocker, but rather a field leveller.

At this point it is worth emphasising that EUWA has been less than forthcoming about commenting on the European Commission’s ongoing anti-dumping investigation. Tyres & Accessories first contacted the association at the back end of 2009, but it was another four months before it went on the record with its point of view. This not is say that the association has anything to hide, but rather it demonstrates EUWA’s determination not to debate the issue in the court of public opinion. EUWA’s confidence now rests in the European Commission’s ability to conduct a thorough and objective investigation into the matter and that its outcome will say everything that needs to said. However, in order to get the European industry’s perspective on the anti-dumping investigation, Tyres & Accessories exclusively interviewed Georg Berrisch, EUWA solicitor and partner at Covington & Burling LLP in Brussels in mid-March 2010.

European Commission Investigation Schedule

Source: European Commission

Up till now the official reasons for EUWA’s complaint have been difficult to come by. Press reports have limited themselves to generic explanations such as “selling wheels beneath cost price” in order to communicate the thinking behind the case. However, EUWA’s silence has arguably left the European wheel industry open to the criticism that they are simply trying to push low priced competitors out of the business in a move that will inevitably force up prices at the distributor and consumer levels. But from the manufacturers’ perspective this argument both overlooks the facts and smacks of short-termism.

The European wheel manufacturing industry’s complaint centres on the key factors it believes have done most to construct the uneven playing field that it believes significantly favours Chinese wheel manufacturers. At the top of its list of complaints is the price Chinese wheelmakers pay for their aluminium. Virtually every wheelmaker in the world (and certainly all those running factories within Europe) buys aluminium via the London Metal Exchange. Everyone, that is, except the Chinese. Chinese companies generally buy theirs through the Shanghai Metal Exchange. In theory there is relative price parity between the actual cost of purchasing at either stock market, but in practice it is said to be a completely different story. The difference is in the application of VAT to Chinese prices. To cut a complicated story very short, Chinese companies reportedly end up with aluminium that costs them an amount equal to the VAT everyone else has to pay (currently 17 per cent) less.

Aluminium price differentials of this size mean Chinese companies can and are undercutting European businesses by way in excess of this amount. Chinese firms may say it is more, but the “fair” advantage gained from the lower staff costs of producing in China apparently only accounts for a 2 per cent pricing differential when you consider that the machinery (and therefore the headcount) used in production in both cases is largely similar. Another 2 per cent can be added on for cheaper machinery sourcing. This differs from a Chinese tyre factory where one might reasonably expect to see considerably more production staff on-shift per tyre than in a European production plant and generally older machinery.

In answer to suggestions that any anti-dumping measures that are implemented will just increase prices for distributors, retailers and consumers, Berrisch points to the fact that an average 17-inch alloy wheel is sold out of the factory for around 40 euros, compared to a retail price of around 200 euros. With a margin of 500 per cent, an anti-dumping measure of even 50 per cent would make little difference to the distributor’s profit margins and therefore the consumer’s ability to purchase a quality product at a reasonable price should also remain unaffected.

EUWA argues that the unfair Chinese manufacturer support is not only crippling the competitiveness of highly efficient and high quality European factories, but also aids the commoditisation of wheels, by keeping prices and standards down.

YHI: Any tariffs will bring ‘limited disruption’

In order to report the perspective of one of the manufacturers at the centre of the investigation, T&A also interviewed YHI Manufacturing (Singapore) PTE Ltd chief executive officer Thomas Lee and senior marketing executive, Deborah Tay, at the company’s Shanghai wheel production centre in China. YHI, which produces well-known quality wheel brands such as OZ, Enkei, Advanti, Breyton and Konig, counts Europe as a key export market and so reports that it immediately and fully cooperated with the European Commissions request for information: “The only way is to cooperate,” Lee said, explaining that the company’s many years of export business has made it “very familiar” with international business practice. As one would expect, the company also has a particularly keen interest in the proceedings of the current investigation.

While the potential implementation of a import tariffs on YHI’s Chinese-produced products will have an undoubted impact on the company’s European business, manufacturing group chief executive officer, Thomas Lee is stoic about the companies ability to adapt in the face of adversity: “Tariff disruptions are only for a certain period,” he said, explaining: “From a manufacturing perspective, you have to keep the plant running, have to sell products to other markets.” And for Chinese manufacturers producing good quality products and selling them at reasonable prices, the very fact they may have to do this is arguably unfair.

Pointing out that the current anti-dumping investigation is ongoing, Lee explained that an import tariff will only result in the kind of company that produces wheels too cheaply switching destination markets. Indeed some company representatives are said have received signals of “super cheap” Chinese wheels being prepared for sale in the US and Middle East markets next. From Lee’s point of view there is “no miracle cure” to this problem and cutting prices to keep sales in a down market is an unsustainable way of keeping a business moving. “Otherwise the result is market chaos or disaster,” he said.

In YHI’s case, the company received notification of the anti-dumping investigation from the EU Commission on 15 August, two days after it began and investigators were then scheduled to visit China between mid-November and December 2009. Lee is optimistic that there is still a chance no tariffs will be implemented and points to several similar cases that have taken place in the last 15 years, but if they are applied the YHI manufacturing CEO expects one of two outcomes – a flat rate tariff applied to Chinese wheelmakers across the board or a set of differentiated tariffs. Again pointing to case history in the automotive parts sector, Lee cited the example of a similar investigation in the brake pads business. In this instance the implemented import tariffs ranged from 0 – 100 per cent. Good if you are in the lower part of the range, but not if you are at the top end.

For Lee the devil is in the detail and, crucially, in the subjectivity associated with this case: “Quality should be judged by the market (and can be subjective)…I believe the impact of competition from Chinese wheel factories…puts European manufacturers to the wall. However if selling price is too low… selling to Europe lower than at home, this would be unfair,” he explained asking the rhetorical question: “Do we receive any subsidies, which unfairly subsidise raw materials or enable us to undercut European wheelmakers?”

During the course of 2009 YHI’s Shanghai, China plant produced around 2 million alloy wheels, down 2 – 3 per cent on output the year before. This year, the company is aiming to increase from this lower base by around 8 per cent with “small steady growth.” The forecasts suggest that the first half of 2010 will be better than in 2009, that’s if you don’t factor in the effects of any legal levies.

But here’s the problem. If the levies are introduced, the European Commission could be invoking a self-fulfilling prophecy that would push Chinese wheel sales higher by virtue of the fact that European customers will be rushing to buy as soon as possible before the implementation of any law and any subsequent price increases. The problem, for Chinese wheelmakers, is that talk of future legislation leaves them between a rock and a hard place. On the one hand the have an understandable need to maintain and increase sales as any sound business would aim to do, however rumours that prices may have to go up 30 per cent could result in a demand spike before the implementation of any levies. A sharp, but temporary 10 – 20 per cent additional increase in sales could go under the radar, but a 100 – 200 per cent spike would make the sector, which is already under intense scrutiny, look more suspicious and could even result in further trade measures.

What happens next?

The next significant event in the anti-dumping investigation will come when the commission returns its provisional measures on 12 May (see table for more details). No-one Tyres & Accessories spoke to would be drawn on what kind of measures will be suggested, but while everyone involved is at least giving lip service to the fact that no decision has yet been made, no-one will be surprised if anti-dumping measures are implemented. The only question marks over this are purely technical elements such as the fact that the investigation will have to demonstrate that the case for wheel “dumping” in European markets rather than the evidence for government subsidy or convoluted support for aluminium product exports through the VAT system because the commission has a policy not to initiate anti-subsidy proceedings.

So what might a potential import tariff look like? No-one at the European Commission, EUWA or YHI wanted to make a hard and fast prediction, but the received wisdom is a range of between 15 and 50 per cent. In all likelihood it will end up somewhere between, roundabout 30 per cent – a bugbear to Chinese manufacturers, but a lifeline necessary for the ongoing operation of some key European wheelmakers. And with sources reporting that current price differentials between Chinese and European products are lying around the 40 per cent mark, you can see why some observers believe a duty of 10 – 15 per cent would make little difference to the market place. But whatever your position in this debate, it is clear that a duty of 30 per cent or more would have a massive impact on the market.