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Standing Committee on Agriculture and Industry - 26/02/2015 - Circumvention of antidumping laws

GUILD, Mr Julian, Market Manager, Transformers, ABB Australia Pty Limited

MOULIS, Mr Daniel, Principal, Moulis Legal

[13:03]

CHAIR: I welcome to this hearing the representatives of ABB Australia. Do you have anything to say about the capacity in which you appear before the committee?

Mr Guild : My role is that I manage the part of the transformer business in ABB that is importing transformers, and I am also responsible generally for marketing and sales across our portfolio of transformer products, which includes product made in Australia.

Mr Moulis : Moulis Legal are the lawyers for ABB.

CHAIR: Thank you very much. Although the committee does not require you to give evidence under oath, I would advise you that this hearing is a legal proceeding of the parliament and therefore has the same standing as proceedings of the House. I now invite you to make a short opening statement before we proceed to questions and discussion.

Mr Guild : Thank you, ladies and gentlemen of the committee, for the opportunity to present ABB Australia's views. Our interest in these issues arises from our unhappy contact with the antidumping in the recent investigation into imported power transformers. It has opened our eyes to what we perceive to be an unhealthy focus on protectionism and promotion of anticompetitive behaviour. I would go so far as to say that foreign exporters and their Australian customers, themselves major Australian companies, employing thousands of Australians, making huge contributions to the wealth and wellbeing of this country, are being demonised by the antidumping rhetoric of their competitors.

I will give you some information about ABB. ABB Australia is part of an international automation-of-power-technology group operating in 100 countries. Just in Australia in 2014, our revenues were close to a billion Australian dollars. In Australia we employ nearly 2,000 people. We operate over 13 sites in Australia. You have probably heard the expression 'business critical'. It describes a deliverable or a service that is tied to the success or failure of a business. Our projects are not only business critical for our customers; many are 'economy critical' for Australia.

We power and support the Ichthys LNG Project in the Northern Territory, the three major Queensland LNG projects, Rio Tinto's massive electrical network infrastructure in the Pilbara, the majority of Australia's recent windfarm projects—the list goes on. We provide major city power substations, currently the Barangaroo power project at Darling Harbour, and the power infrastructure for public transport systems such as the Gold Coast light rail. For more than a century, our products in generation, automation and transport distribution have been the backbone of Australia's prosperity. We are proud of that contribution.

Where I am based in Moorebank—you will see it from the M5 as you drive into Sydney—there is a factory with office and factory buildings with a big ABB sign. We employ 400 people in manufacturing, service and operations. This includes a complex for the production of outdoor switchgear, kiosk substations, high-voltage switchgear and low-voltage switchboards. The factory assembles engineered medium-voltage panels and does turbocharger servicing for the large ships.

We have other facilities at Notting Hill, in Victoria; Darra, in Queensland; and Malaga, in Western Australia, providing service and support for transformers, manufacturing of transformers, switchgear, high-voltage bushings and generator circuit-breakers. We also do industrial substation commissioning from those sites.

ABB powers Australia. We are deeply embedded in Australian industry. We are committed to our workers and to the Australian community. Our community programs sponsor and promote the welfare of Aboriginal and Torres Strait Islander people, our Defence reservists and women in the workplace. We support the next generation of Australian engineers through millions of dollars we have donated for learning labs, scholarships for underprivileged students, research and innovation. Universities which benefit from ABB's commitment include the University of Queensland, the University of Sydney, Monash University and RMIT University, in Melbourne. We are as much an Australian company as those who manufacture some of the things we sell in this country. In terms of size, scope, innovation and diversity, I think we can safely say we are indeed more significant to the economy than most of our competitors.

Why am I telling you all of this? I am telling you this so that you can know and understand that we are a big Australian, and that we bleed like any other Australian. For those of you that think that antidumping regulation only hurts foreign exporters, please think again. Aggressive antidumping regulation supports the less efficient and the less competitive-minded. It forces up input costs, mostly in strategic industries. It not only penalises large enterprises, such as us and the industries we service, but also hurts SMEs and mums' and dads' businesses involved in secondary manufacture, distribution, fabrication and resale.

As an Australian employer, we are not immune to the impact of market fluctuations, both international and domestic. Regrettably, tough market conditions have reduced our workforce. We have to run our business efficiently at a local level. We are not subsidised globally. We have to make adequate returns here in Australia. We have stewardship responsibility to our operations in Australia, and our supplying factories overseas have the same corporate responsibilities in their jurisdictions.

I want to be clear that ABB recognises the availability and legitimacy of antidumping regulation in circumstances of clear and consistent below-cost pricing that amounts to predatory behaviour or that has materially injurious impact on an Australian manufacturer or processor. Nevertheless, the assessment of dumping and all of its impacts needs to be robust. I use the word in the sense that dumping ought to be properly proven. Injury needs to be real and not created by external circumstances, by inefficiencies or by an inability to compete. The injury caused should take into account the particular attributes of the Australian industry that complains of the dumping. Is it efficient? Are its practices world's best? Does it deliver world-class technology? The conditions of competition in the marketplace and the benefits of that competition to the Australian economy should also be considered.

I recognise that your inquiry goes to the question of anticircumvention, and I am about to comment on those specific aspects shortly. However, I do wish to emphasise to you that your inquiry—

CHAIR: Julian, how much longer will you be?

Mr Guild : Two minutes? Maybe one? Two.

I wish to emphasise that your inquiry into that topic is taking place in an environment of antidumping zealotry. This hot-headed attitude is promoted by a vocal minority of manufacturing and processing companies; it is an attitude that is not supported by the quiet majority of companies. It is an attitude that stifles domestic competition. It is an attitude born of an exchange rate crisis faced by Australian import-competing industries that no longer exists. Dumping duties imposed in Australia impede our exporters from competing internationally, in countries whose manufacturers enjoy lower costs that are not affected by dumping duties. I ask you to recognise these things, to not be caught up in the zealotry I have described, to moderate your views and to balance your consideration appropriately.

ABB's submission to the committee takes the form of a covering letter and a copy of our submissions to the Harper review on competition policy. I am not going to repeat those, you will be pleased to hear. My final comments, then, relate specifically to anticircumvention. Many of the submissions to this enquiry relate to changes in product specifications which technically remove the product from the scope of dumping duties on similar products. That topic has not been the subject of ABB's submissions before now and is not of direct significance to ABB. Nevertheless, ABB does offer an opinion that certainty is important to exporters and importers. The scope of goods to which an investigation extends and the dumping duties that are applied should be clearly described from the start. In considering whether technically different goods should have dumping duties imposed on them post hoc, the committee should consider the possibilities that the technical changes and innovation that create a different product that is attractive to consumers by reason of that difference take place at a cost or generate a price that is different to that of a product that is subject to the dumping duties, and justify consideration of competitive factors that are not related to price. Simply extending a dumping duty to the changed products in any of these cases, without considering the questions of dumping or injury, would ignore both the antidumping principle and the benefits of innovation and free competition.

In our submission we have addressed two matters of specific concern to ABB regarding the anticircumvention laws. The first of these is the anticircumvention activity said to be constituted by the importation of a significant proportion by value of the parts of a product that is subject to dumping duty and then assembling them here. Apparently the parts would then be subject to the same duties as the finished product. By way of this ambiguous provision, potential investors in Australia and local entrepreneurs are warned off investing and innovating in Australia or employing Australians. It is therefore a law which offends against open markets, free competition, innovation and investment.

The second is the anticircumvention activity said to be constituted by the sale in Australia by an importer of goods subject to dumping duties where the importer does so without increasing the price by an amount commensurate with the total amount of dumping duty payable. If dumping duties are imposed on imported goods and the importer pays the duties but absorbs those duties by reducing its profit, it can be investigated for not increasing its price. That to us is astounding. From ABB's perspective this prospect has swung the pendulum of antidumping policy way too far towards protectionism and amounts to a law allowing an Australian industry to tell an Australian competitor that it is not earning enough profit solely in the domestic market and that it has to increase prices—even if it has already paid the dumping duty on the goods. That concludes my comments. I thank you for listening and look forward to questions.

CHAIR: In your report you say the committee press release advice suggested that we were prejudiced towards manufacturers—I would probably dispute that. But, having said that, I would make the point—and you made it—that this inquiry is solely interested in circumvention. Much of the evidence you just gave then would, to me, reflect on the primary case of whether or not the antidumping duty should have been applied in the first place. While it is quite appropriate that you should raise that here—obviously you are in the industry and you want to give it an airing—our final recommendations, whatever they are, will probably not be influenced by what we have heard in that area.

Having said that, I am particularly concerned that you have been subject to an investigation for 406 days—obviously longer now since time has passed since you wrote that submission. Tell us about that. What on earth are the delays? What is the problem and why has the air not been cleared?

Mr Guild : The commission takes the view that the investigation was necessarily long because of the complexity of the product.

CHAIR: This is the transformers we are talking about?

Mr Guild : This is the transformers.

CHAIR: Just to take it back a little bit then, are we talking about an entire transformer or componentry of a transformer?

Mr Guild : We are talking about more than the transformer in terms of the real market that we are operating in. We deliver a transformer ready to operate. It is a very big thing. Some transformers that were subject to the inquiry are bigger than this room. So very clearly it cannot be delivered assembled to the customer's site. It needs to be delivered in pieces and put together as a final assembly. That involves local transport, logistics, oil filling, testing and commissioning. There is a part of the transformer that is built in a factory, put together and tested. Then it is taken apart again, delivered to the site, put back together and tested again. The antidumping case is focusing on the export price of the transformer, which is one part of that supply chain. Various mathematical cost models have been constructed through the course of the investigation to try to get a point of reference at the point of export—to create some sort of equivalence between local price and export price, ignoring the other parts of the supply chain. That is what the customer pays: 'home market price'.

CHAIR: Just to clarify that: what you are saying is that parts of the transformer are brought into Australia, while some parts come from Australia, and that you are having to pay a differential price—but then the entire cost of the transformer is considered for the antidumping duty at the end of it. Is that right, or do I not have a handle on that?

Mr Guild : It is a comparison of the export price of the basic transformer itself—without the installation, without the oil fill and without the assembly—against the local product. It is then compared to a constructed model of the same unit on the domestic market from the original manufacturer. The difficulty comes from the fact that it is an engineered product. We are like a shipyard: we get a specification for somebody's transformer and we design it—there is a very big engineering process involved—and then we build it and sell it at a profit. The difficulty from the commission's point of view—they say it is not a tin of beans, so you cannot compare the price in China with the price in Australia and conclude that there is dumping going on. From our point of view, we found that there was some level of concern that we were looking at dumping margins that were negative from ABB's point of view throughout the investigation. There were progressive extensions requested and granted. Finally, at the last minute, a positive dumping margin was constructed in the case of two of our plants. That is now the subject of an administrative review.

Ms McGOWAN: Why has it taken so long? Is it just because, as you were saying, it is so complicated and it is an artificial thing that is happening?

Mr Guild : The commission is saying it is complicated. From our point of view, we live and breathe this stuff, so for me it is simple. I have been an engineer working with transformers for 35 years. Maybe Danny can throw some light on that.

Mr Moulis : It was not just the complexity of the issues; it was also the workload of the Anti-Dumping Commission over the period of the investigation. Under the WTO, investigations are meant to be concluded in one year, except in special circumstances where they can go up to 18 months, and this investigation lasted 17 months. From ABB's point of view, as they make quite clear in their submissions, the investigation took way too long. It created a huge amount of uncertainty in the market. The investigation itself can be used as a marketing or a sales ploy—that risk or that danger acts like a sword of Damocles hanging over the importers who are trying to conduct their business in this country. There were also quite a lot of changes—Julian has mentioned one change—in the methodologies and the opinions that the Anti-Dumping Commission had throughout. That caused significant delays, but there were also long periods of silence.

CHAIR: What is the outcome of that now? What is the current state of play?

Mr Moulis : The outcome of that has been that, although through the whole process the ABB Thailand and ABB Vietnam factories were found not to have been dumping, at the last moment, by using a different methodology for calculating a dumping margin, they were found to be dumping—the Thailand factory at a rate of 3.7 percent and the Vietnam factory at the rate of 3.8 percent. Dumping duties were imposed on power transformers from those factories. As Julian has mentioned, that is now subject to review with the Anti-Dumping Review Panel. The way those margins were calculated—I will not use the word 'fabricated'—was to ignore the occasions when it was not dumped. That, in four or five words, is the nub of it.

Mr ZAPPIA: I just find it perplexing that, if you do not have a case to answer, that cannot be settled early, quickly and simply. You partly explained to me why that is so, but is there anything, bearing in mind that the Anti-Dumping Commission is not going to go away, that could be changed about the way it operates that would make it, in your view at least, fairer and easier to deal with?

Mr Guild : Danny can probably comment on the technical side of that, but from a pure business perspective—and as someone who has lived through all 400-odd days of this investigation—I would have to say: clear definitions of what dumping is, clear definitions of the methodology and a focus on companies that are genuinely setting out to do harm to Australian industry, rather than companies like ABB that are caught up in some complex analysis of relative profitability between markets. I do want to be clear: at no stage have we been selling transformers at a loss. We have factories manufacturing them profitably and selling them to ABB Australia at a profit—and then ABB Australia is delivering the transformer, as part of an overall project delivery, at a profit.

Mr Moulis : I think the greater rigour that we are talking about here, in terms of assessing 'what is injury', and thinking about what constitutes injury at the end of the day—and about whether there is really dumping—would prevent a lot of these cases being initiated. I will give you an example. There is presently an investigation on foot where an Australian industry that assembles the product it claims is being dumped holds—or held at the time—0.18 per cent of the Australian market. By way of that case, that Australian industry—I am talking about the solar panels case—threatened to impose a 14 per cent tax on the other 99.82 per cent of the market. There is a value judgement to be made there about what we are trying to achieve. To make that case even more interesting, the componentry that is being used to make those solar panels in Australia is imported from China, which is the country against which the complaint of dumping is being made on the finished product.

There is another case I will mention to you. A few days ago one of our major steel manufacturers announced a $64 million profit. It is presently maintaining a case, in relation to coated steel products, against India and Vietnam. Again, if there were more rigour being directed towards the decision of whether to initiate, because the antidumping laws were more robust—and we are using our meaning of 'robust', which is not the same as how the commissioner used the word—there may not be as many cases which are not good in terms of competition policy or economic policy. The commission would therefore would have the time and the space to do its job more effectively and more quickly in cases which are merited.

Mr ZAPPIA: I do not know if it appropriate to ask, but I think I know the name of the solar company and I was going to ask if you would care to tell me which it is?

Mr Moulis : The applicant in that case is Tindo Solar.

Mr ZAPPIA: That confirms my suspicion, thank you.

CHAIR: You outlined the 'zeroing methodology' and also the 'punitive measures'. Could you just explain that to us a bit, please?

Mr Guild : I will start and Danny can jump in. The zeroing methodology is something we mentioned earlier—that, after 400 days and at the last minute, we got this new methodology which created a positive dumping margin for ABB Thailand and ABB Vietnam. The methodology basically—I am simplifying, and Danny will stop me if I am oversimplifying—means that you have a population of transactions over a three-year period of investigation. There are hundreds of transactions. On a transaction-by-transaction basis there is a cost model that compares the export price with a simulated transaction in the exporter's domestic market. It generates a cost and a price that is derived through an average domestic profitability. This is one of the complexities of the transformer case, because the technical requirements are different in Australia than they are in the domestic market. So you have to take the Australian model and then analyse it as if it were a domestic model in order to get a price comparison. When that transaction-by-transaction methodology is applied, you end up with a population of transactions spanning three years, with the vast majority showing negative dumping margins—in other words, more profitable in Australia than they would have been.

Mr Moulis : Not dumped.

Mr Guild : Yes, not dumped.

Mr Guild : With that, you have a small sample—a handful of transactions—that had positive margins. Zeroing methodology assumes that the average dumping margin can be calculated by setting all the no-dumping margins to zero and then taking the average of all of the zeros and the handful of positive numbers to generate a positive—

CHAIR: I am going to have to interrupt, Julian. We will come back to it and I do not think we have far to go, but Cathy has to leave in a moment. Could someone move that we form a subcommittee?

Ms McGOWAN: Yes.

CHAIR: That is good.

Ms McGOWAN: Excuse me having to leave, but thank you very much for your presentation.

Mr Guild : Thank you, Cathy.

CHAIR: Please continue, Julian, sorry.

Mr Guild : Yes, I had just about finished. So basically—as an engineer the mathematics offends me—you are taking an average of a sample of transactions, ignoring the ones that do not suit the argument and only considering the ones that do.

CHAIR: Can I make an inquiry as to who lodged the original antidumping applications against you?

Mr Guild : That was the Wilson Transformer Company.

CHAIR: They are manufacturing transformers in Australia, obviously?

Mr Guild : That is correct, yes.

CHAIR: Where are they based?

Mr Guild : They are based in Melbourne in Dandenong.

Mr ZAPPIA: Do they import product as well?

Mr Guild : Not in power transformers. They do in distribution transformers. They have imported product from New Zealand and rebranded it under their own logo.

CHAIR: One of the things that you raised that you are quite offended by—and it is one of the things I struggle a little bit to get my head around too—is that, if we put a tariff on and then the importer absorbs the cost, it is seen as maybe not doing its job. How much potential does an importer have to absorb the cost, given that you are in a competitive market already? One would think that, even if you were only competing against, say, an Australian based product that might be more expensive than the one you are importing, there would be another importer that would be competing against you. So why is that market not competitive in the first place—if you were able to absorb those types of costs?

Mr Moulis : I think a distinction does need to be drawn. Making sales at a loss, which is called the practice of 'sales dumping', has always been something that the WTO rules have captured. In other words, if the export price from the exporter to the importer is 100 and his on-costs are 10 but he only sells for 105, then we are not going to accept 100 as the export price, we are going to take five off it; we are going to work back to 95—because those sales by the importer are at a loss. That right has always been there and I was interested to hear Capral earlier say, 'We could never attack that in the past.' But they could. All you have to ask for is a review of the variable factors. The commissioner could then go to the companies, the phoenix companies and all the companies he mentioned and say, 'Are you guys presently making money on that?' If the case were as Capral said, they would say, 'No, we are not.' The export price would then change. It would go lower, which is essentially what the outcome of a circumvention case is. It is an old remedy in new clothes.

However, the problem with the new remedy, which I think we have explained on numerous occasions, is that it does not depend on sales at a loss. In other words, if an importer is in this situation—let us say they are exported to Australia at 100, his on-costs are five and he sells for 110, but his duty is five—he could then sell for 105. Under this law about anticircumvention, he cannot—because he has not increased his price commentate with the five. He is being told to sell for 115. Now that is truly a competition policy issue and it is an intervention into normal commercial behaviour here in Australia. The dumping duty is being paid, penalties are being paid, but the importer is not being allowed to compete at a level at which he can still make a smaller profit or breakeven for a while.

CHAIR: Do you think in most cases it is the importer wearing that duty? Or is it the source company?

Mr Moulis : It has to be the importer wearing the duty, in terms of antidumping principle, because if the exporter finances that duty then that is a problem in sales-dumping terms. So it is the importer. Obviously it depends what kind of industry you are in as to whether the importer is making a big profit or a little profit.

Mr Guild : Ultimately it is the end customer. It is you and me, because the local industry has a big market share but not big enough that Australia can be sustained purely on domestic manufacture. So ultimately the price level increases to accommodate the dumping margins.

CHAIR: I can understand that this works in the domestic market but, if you are actually supplying an export contract somewhere, where are you exporting your finished products to? What kind of countries? From Australia, I mean.

Mr Guild : From ABB Australia, not so much in transformers, because we have a distributed factory network in Australasia, if you like. So we have a factory in New Zealand. We have a factory in Perth for distribution transformers. They are the small ones—outside the scope of the dumping investigation. But I do not have the numbers, because I am very narrowly focused. We all live in silos at ABB, I am sorry to say. So I am focused on power transformers, mainly, and transformers in general. But, in our switchgear, our medium voltage division does prefabricated switchrooms that get exported all over the world. The specifics of the countries I could not tell you; we could give you some details on notice.

CHAIR: Perhaps we might get you to do that for our own information.

Mr Guild : Yes, sure; I am happy to do that.

Mr ZAPPIA: You have just gone through an explanation, and you have used the example of $100 plus 10 per cent duty and so on. I am sorry; you lost me there. Very briefly, because we both have to get to the chamber—

Mr Moulis : Let us say at the time period of investigation, where they are looking at the question of injury, the importer was selling in this country at $110, and he is importing at $100. That export price from the foreign country to Australia, at $100, is found to be dumped, so assume he has to pay $5 dumping duty. But we have just established a while ago that he had a $10 margin previously. So, if he chooses to earn less of a margin and maintain his price in Australia at $110, or even reduce it if he has that much flexibility, that would be a normal commercial reaction. But the anticircumvention law that we are talking about and looking at here says that, if an importer does not increase his price commensurate with the amount of the duty, there can be this investigation and the variable factors can be changed to penalise or to make it more difficult for him not to increase his price. I read the evidence that was given by the commissioner and his staff, and there was a focus on sales at a loss, and that was the focus that Capral presented a short while ago as well: 'Oh, you know, if their sale is at a loss, we should be able to do something about that.' Well, that is not the issue that ABB is addressing.

CHAIR: I struggle to get my head around that when I am reading the material on this. I go, 'That's an interesting concept.' I think we will wind it up. Thank you for your attendance here today. Please note that we may wish you to reappear towards the end of the inquiry to gather further evidence or reflect on things that have come up in the investigation. If you have been asked to provide some additional information, which you were, could you please forward it to the secretary, and you will be sent a copy of the transcript of your evidence, for which you can request corrections to any transcription errors. Thank you very much for your attendance here; it has been most valuable.

Mr Guild : I just wanted, on behalf of ABB, to thank the committee for the opportunity to present a position.

CHAIR: It is very important you are here, so thank you very much.

Resolved that these proceedings be published.

Subc ommittee adjourned at 13:39