Valbruna Steel Mill in the grip of industrial espionage and dealing with unfair international competitive practices

Inviato da Redazione Finanza il Ven, 14/03/2014 - 16:25
Quotazione: ACERINOX
Quotazione: OUTOKUMPU
Last week, the Court of Vicenza sentenced Rahul Suri, the former Director General of the Indian steel mills Viraj , to pay , jointly and severally with the company, provisional compensation of 10 million euros for theft of industrial and commercial trade secrets awarded in favour of the Italian steel mill Valbruna . The manager was also sentenced to 1 year and 10 months in prison.

This figure is set to rise significantly as the Civil Court of Vicenza has still to quantify the level of damages to be awarded, following Valbruna's demand for 450 million euros in damages. This figure takes into account the damage caused by the acquisition by Viraj of the Venetian company's operating policies, loss of revenue recorded for the period in question and future losses tied to pressure on margins as a direct result of extremely competitive pricing adopted by Indian company. Further amounts may be added to the initial compensation following the outcome of other similar prosecutions being brought by Valbruna against Neeraj Kocchar and son.

These events began in 2006 and continued until 2010 leading to the conviction of Suri, the manager of the Viraj steel mills and the owner's nephew Neeraj Kocchar, highlighting the importance of Western companies protecting their trade secrets when operating in emerging markets.

It is apparent from the file that, after an approach during a trade show, Rahul Suri and the nephew of the owner Neeraj Kocchar offered the Valbruna Italian group product manager a very well paid job in their German subsidiary in return for, as shown in the Court records, information including the entire Valbruna customer list as well as prices charged by the Italian steel mill. In exchange, the manager was paid a salary five times higher than that expected at the time, a value significantly above the market rate.

Viraj is an active business operating in more than 90 countries worldwide. Viraj, the protagonist of a meteoric rise since 1990, has come to have a production capacity of 348,000 tons of steel per year. In absolute terms Viraj is a long way behind the two major producers in the Indian market: Rashtriya Ispat Nigam Limited producing 30 million tons of steel annually, Tata Steel with 28 million and other Asian producers such as Posco with 40 million tons per year. By way of comparison, the closest rival in size would be American Universal Stainless.

The element of interest here, is understanding how Viraj was able to achieve such marked growth in a relatively short period of time.

While on the one hand there is undoubtedly a structural issue linked to the growth of domestic demand for steel in India: from 28.42 kg of steel per capita annual consumption in 2001 to an estimated, indicated increase in consumption of up to 138.03 kg of steel a year in 2021. On the other hand the combination of low labour costs, a low monthly salary per employee of EUR 100, the ability to take advantage of technological developments and industrial secrets of Western companies are all factors which have enabled Viraj to attack the market with extremely competitive pricing.

Evidence of this can be found in the analysis of the numbers. From the trial papers it emerged that Valbruna, with an annual production of about 170,000 tons of high- quality speciality steel, experienced a decline in the volume of business for the period 2006-2010 in the order of 5/10 thousand tons of steel per year.

Considering the period in which this took place, it would be reasonable to equate the decline in turnover with the economic downturn which has gripped the global economy and Europe in particular in recent years. Analysis of the data from the Worldsteel Association shows however, that world steel production increased from 1,147 million tons in 2005 to 1,518 in 2011. The average growth rate in the period 2005-2010 was 4.5 % and 6.2% in 2011.

This evidence corroborates the drop in volumes reported by Valbruna were not due to issues in demand but rather more to do with unfair competition. As stated by the Court, with the help of a corrupt Valbruna product manager, Viraj managed to work out fundamental elements of operational policies of Italian company. These policies were procedures for determining the quality of products, providing guidelines on the methods of casting, the amount of steel to be used and all the procedures required to achieve the final product.

In America, the removal of trade secrets would lead to the immediate arrest of the corrupt product manager and 5 years imprisonment. In Europe however, this violation is not considered a theft as the physical removal of documents, as far as Europe is concerned, are still within the boundaries of availability for the company affected by their removal.

European companies are at a serious disadvantage with a legal system that does not provide for the full protection of trade secrets.

There is a further key strategic detail to be considered: Indian steel mills in Europe can market their products free of duties of any kind. European steel mills, on the other hand, are subject to considerably high protectionist duties in the Indian market. It is almost superfluous to point out that this has a real effect on competitive forces within the market.

While we wait to see how the Eurozone, the third largest production area in the world, can and will protect their companies, big names in the industry such as the Acerinox, Spain or Outokumpu, Finland will have certainly already taken greater steps to safeguard the access to confidential information and documents. Even American companies such as Carpenter Technology, who already benefit from greater legal protection, will have taken steps to implement safeguarding procedures to avoid running into similar unpleasant circumstances.

Given the track record and the difficulties shown in protecting trade secrets from competing companies in emerging markets, a tighter control over employees who have access to strategic information is a vital first step in maintaining the competitive edge of steel companies in the West; if only for the strategic importance of this industry and the high numbers of workers it employs.

At a time of great turmoil for the steel industry, WIRE & TUBE 2014, one of the most important trade shows, will be held in Dusseldorf in the next few weeks from 7 to 11 April. It will provide an opportunity for an exchange of views between the market and the companies operating in it, in the hope it will not provide a catalyst for further unsavoury legal action.
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