Teaching Ohio Business a Lesson
Monday, September 10th, 2007 By David Hansen(For a more recent posting on MMK’s interest in Ohio, go here.)
One cost of doing business is the regulatory burden imposed by government. Economists know this cost factor to be a kind of a tax that contributes to Ohio’s uncompetitive climate for business as much as does any direct tax such as state and local income taxes, the CAT tax or local property taxes.
That the regulatory burden of Ohio hurts business and costs us jobs is seen in the negotiations underway between the Ohio Department of Development (ODOD) and Magnitogorsk Iron & Steel Works, a Russian steel manufacturer looking to build a new steel plant in Scioto County.
As part of the package to lure Magnitogorsk to build in Ohio, the ODOD reportly will cut for the company the notorious red tape of environmental applications and regulations other Ohio manfucturers face in building and running their plants.
It’s hard to believe that Magnitogorsk would ask, and the EPA and ODOD would consider this request, if the regulatory burden weren’t a significant factor in Magnitogorsk’s location decision.
A spokeswoman for the company summed it up nicely: “[The decision] would depend on the incentives we would be offered, as well as on getting environmental permissions.” For Magnitogorsk, taxes (reduced by ‘incentives’) and regulation are one and the same. And clearly not just important but decisive in their location decision.
On Friday AK Steel chose to go public with its concern about Ohio giving a competitor such as Magnitogorsk a signficant cost advantage not shared in by other Ohio steel producers.
“While we applaud the attempt to bring manufacturing jobs to Ohio, our concern would be any kind of state incentives that would disadvantage the existing steel industry,” AK Steel Corp. Vice President of Government and Public Relations Alan McCoy said in an interview Friday.
Noting the state has released very little detail about Magnitogorsk Iron & Steel Works’ interest in constructing a steel plant in Ohio, he said it appeared likely the company would produce steel for the automotive industry. “They’re going to be in competition with existing steel companies” if early reports prove to be correct.
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“It’s not the fact that it’s a foreign entity - that’s not the issue,” [McCoy] said. “We would not like to see the state providing any kind of incentives that the other steel makers or other businesses couldn’t have access to as well…. Otherwise you’re having the state more or less pick and chose winners and losers.”
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DOD officials refuse to release any details about what incentives may be in play for MMK, but Ohio Environmental Protection Agency spokeswoman Melissa Fazekas said the agency may be able to expedite the environmental permitting process.
While it usually takes about six months to obtain the necessary pollution permits, prior discussions with MMK’s environmental consultants will help to substantially streamline the process, should the company decide to build in Ohio, she said. The agency has not yet received any permit applications.
The residents and prospective employees of a new steel plant probably could care less about the unfair advantage reportedly being offered Magnitogorsk.
But I wonder what the employees of AK Steel in Coshocton or Pro-Tec in Leipsic or Worthington Steel in Delta, all of which appear to be producing a similar product for the same customers as proposed for Magnitogorsk, think about the state of Ohio giving a competitor such a sweet deal.
Given the slow growth of the domestic automotive market and the extreme pressures the automotive manufacturers put on suppliers to hold down costs, the 1,000 jobs proposed for the Scioto County plant could cost jobs at these other Ohio plants.
If Magnitogorsk is built on the terms being talked about, it will be a new source of steel supply facing lower operating costs and so able to charge a lower price than current manufacturers. With slow growth in demand, the result will be less steel sold at current prices by these established plants, meaning they’ll have to either lower production or lower prices. In turn this means fewer hours for employees, lower profit sharing payouts, slower growth in salaries and even outright job cuts at AK Steel, Pro-Tec or elsewhere.
If this were the result of free market forces, of factors such as innovations in the productive process, this would be a good thing. The established companies would need to sharpen their business practices to compete with the new player in the market.
Instead, if the Magnitogorsk plant were built the competition the established companies would face would be the result of politics, not economics. Then the lesson for the established companies is that sound business strategies and execution are not enough to succeed in Ohio. It takes a good lobbyist and/or public relations strategy to secure the same tax and regulatory breaks given by the politicians to your competitors in order to maximize the rate of return on your investment in Ohio.
This is ultimately a losing lesson for Ohio.
Tags: Regulation
