ECONOMY: Racism, a Factor in World Trade?

By IPS Correspondents Reprint | | Print |

Paranjoy Guha Thakurta

NEW DELHI, Jun 13 2006 (IPS) - Lakshmi Mittal, who heads the world’s largest steel manufacturing conglomerate, has no business interests in India. Yet, his failed attempts to buy Arcelor, the European steel-maker, are followed closely in his country of origin.

As Indian entrepreneurs spread their wings outside the home country, as a natural corollary to a liberalised economy that is growing at an impressive eight percent clip, they are coming up against resistance – enough for ministers in New Delhi to hurl accusations of protectionism, if not racism.

Commentators see this phenomenon as a manifestation of the inability of erstwhile colonial powers to come to terms with the resurgent economies of developing countries. It seen as one reason why attempts, such as Indian ‘booze baron’ Vijay Mallya’s bid to buy out French champagne maker Taittinger, come to nought.

The running spat between Mittal and the Luxembourg-based Arcelor, the largest and second-largest steel producing groups in the world, grabbed headlines, this week, after the board of directors of Arcelor rejected an improved bid by Mittal Steel.

In January, Mittal had made an unsolicited offer – reportedly over dinner – to buy out controlling interests in Arcelor, which has a presence in several European countries including France. The management of Arcelor perceived this offer as a hostile bid..

After it became clear that Arcelor was not going to relent to the Mittal Steel buyout offer of 23.8 billion US dollars, Mittal Steel raised its offer to around 33 billion dollars. The new bid was made after Arcelor tried to bring in a “white knight” in the form of Russia’s largest steelmaker, Severstal, in order to thwart the Mittal bid.

Rejecting the new Mittal offer, a Jun. 12 statement issued by the Arcelor board stated: “à having consulted Morgan Stanley on the financial aspects of Mittal Steel’s revised offer, the board has unanimously concluded that Mittal Steel’s current offer is inadequate as it continues to undervalue Arcelor; the Severstal transaction is a more attractive alternative from a strategic, financial and social point of view.”

The rejection by the board of the new offer has left behind a trail of questions relating to protectionism, shareholder interests and racism.

But by rebuffing Mittal and referring to his Indian roots, Arcelor has made him a folk hero in India despite the fact that, so far, he has only promised to invest in the iron ore-rich state of Jharkhand in eastern India. On more than one occasion, India’s commerce and industry minister Kamal Nath has publicly hinted that racist discrimination could be behind the rejection of the Mittal bid.

The charge may have substance given that Arcelor preferred a less lucrative deal with Severstal. On May 26, Arcelor announced that it planned to merge with Severstal to create the world’s biggest steel company with a 70 million tonnes-a-year output and sales valued at 46 billion euros (or 58.9 billion dollars). As part of the deal, Arcelor said it would buy 90 percent stake in Severstal, headed by Alexey Mordashov.

It is being claimed by Arcelor’s critics that what is being hyped as a merger is, in fact, an acquisition by Severstal. The European Commission has revealed that regulators had received two filings – one from Arcelor to take over Severstal, and the other from Severstal to take over Arcelor.

Mittal has criticised the double filing, saying this was evidence that Mordashov was going to take control of the European company. Mordashov, who is known to have close links with the Vladimir Putin administration in the Kremlin, has denied the charge.

Prof. Sushil Khanna, at the Indian Institute of Management, Kolkata, told IPS: “This entire controversy is a consequence of both racism and protectionism. The existing Arcelor management is using the twin strategy of race and nationalism to defend its own entrenched interests. It is under this strategy that the Arcelor management is trying to get European governments and regulators on its side. As for Arcelor’s shareholders and investors, they frankly couldn’t care less about the colour of the money.”

Many believe that Arcelor could soon be confronted with a “shareholders’ revolt” and already some have complained that they have no say in the proposed merger with Severstal. According to current Arcelor bye-laws, shareholders will be able to veto the Severstal deal only if at least 50 percent of them vote against the proposal. The investment banker, Goldman Sachs, has been mobilising shareholders, but these efforts may be in vain.

Last week, EU gave the Mittal bid a green signal. “The Economist” magazine argued that it made far more business sense for Arcelor shareholders. “Severstal has similar assets to Arcelor, but Mittal has a more extensive distribution network, a wider geographic reach and more market powerà Investors question the planned deal’s industrial logic, too,” the publication commented.

After Arcelor described Severstal’s Mordashov as a “a true European”, on Jun. 1, minister Nath told the AFP news agency: “When the Russian offer came nobody made any comment and that seemed very strange to me. So was it a question of takeover or was it a question of Mittal being Indian?” A spokesperson for the French government quoted by the agency denied the allegation of racism.

Sunil Jain, associate editor of ‘Business Standard’, a leading multi-edition financial newspaper in India, told IPS: “It’s his (Nath’s) way of showing the Europeans their place in today’s post-colonial world. In the same vein, Nath had also invited Dubai Ports World to invest in India if the U.S. is not ready.” (In mid-February, the government-owned UAE company had to withdraw a bid to take over the management of six port terminals in the U.S.)

Nath made the comment at a reception hosted by the Indian Business and Professional Council in Dubai late February. “Free traders talk of national treatment in cross-border movement of capital, yet they oppose Mittal Steel’s bid for Arcelor and Dubai Ports World’s proposed investment in the USà India is joined by 105 other countries in opposing some of the WTO (World Trade Organisation) agreements.”

Jain said that middle-class Indians are “very proud” of the achievements of persons of Indian origin, even if these individuals have little connection with the home country. “It’s the Kalpana Chawla syndrome – her death was mourned in her native Haryana state although she had left the province many years earlier,” he remarked, referring to the NASA astronaut who died in the ‘Columbia’ space shuttle disaster in February 2003.

India’s commercial relations with France were strained recently after the flamboyant Vijay Mallya offered to buy Taittinger. The French were upset with the idea of an Indian controlling a company that is part and parcel of popular French history. Taittinger was finally sold to a French regional bank for 849 million dollars, against Mallya’s offer of 750 million dollars.

There are other international deals where race and nationality have stalled sound business propositions. The Chinese government thought it prudent to ask the China National Offshore Oil Corporation to back off from taking over the U.S. petroleum giant, Unocal.

On the other hand, the Chinese Lenovo’s success in acquiring IBM’s personal computers business shows that the trend whereby companies in developing countries buy up prestigious corporate groups in developed nations may be hard to stop.