Tata Steel Expanding Beyond Boundaries

Tata Steel Expanding Beyond Boundaries

An assignment on International Business, ePGP-02, IIM K

submitted by Sudheer K
ePGP-02-078 email: sudheer.ampli@gmail.com 02-Sep-2010

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Tata Steel Expanding Beyond Boundaries

Contents
Contents..................................................................................................................... 2 Objective....................................................................................................................3 Economic Environment and liberalization...................................................................3 Industry Overview......................................................................................................4 Tata group ................................................................................................................. 4 Tata Steel................................................................................................................... 6 Tata Steel- Pursuing International Expansion Opportunities .....................................7 Conclusion................................................................................................................ 10

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Objective
This study report analyses the strategic acquisitions made by Tata Steel to expand their international business. The importance of this acquisition of Corus ,UK has a lot of significance in the current business context . This was the first of its kind by an Indian company tried to acquire a company of 4 times its size abroad. This takeover created an uproar in business circles because of the audacity of the deal. This report analyses the macro-economic setting, the inorganic expansion of various Tata companies abroad followed by an analysis of strategic reasons behind the acquisition. There are not many opportunities for producers in emerging low-cost markets to gain access to the markets of Europe other than by acquiring a company like Corus, John Quigley (Editor, Industry Publication Steel week)

Economic Environment and liberalization

India was on the brink of defaulting on its BOP as the Forex reserves fell too low in the middle of 1991. The Government of India used this crisis situation to bring in economic liberalization and welcome globalization. The dismantlement of the licensing regime and other regulations that planned and protected Indian industry, businesses were given free rein, but they were also newly exposed to foreign competition. The Tata reputation made many group companies sought-after partners by foreign investors. Tata companies partnered with AT&T, Mercedes-Benz, IBM, Silicon Graphics, Cummins Engine, Honeywell, and other foreign companies during the 1990s. These partnerships helped the Tatas build their capabilities to compete in the global marketplace. The Asian financial crisis by end of 1990s gave the Indian economy faced another wake-up call which triggered Ratan Tata think beyond the Indian basket. However regulatory restrictions didnt allow Indian companies to grow abroad as they would have wanted. As Indias foreign exchange reserves grew from the through in 1991, these limits were gradually loosened. In 2000, the Foreign Exchange Management Act (FEMA) replaced the constrictive Foreign Exchange Regulatory Act, easing regulations on foreign exchange transactions and beginning the process of capital account liberalization. Starting in 2004, Indian companies could invest as much as 100 percent of their net worth overseas and could invest or acquire businesses 3 ePGP-02-078

Tata Steel Expanding Beyond Boundaries overseas unrelated to their domestic business. The Reserve Bank of India raised the cap on total overseas direct investment by Indian companies to 400% of net worth in 2007. Indian companies were also permitted to borrow from domestic banks for foreign direct investment and acquisitions by 2005. The overall growth of the Indian economy coupled with the boom of Indian securities markets also fueled Indian companies overseas expansions including ADR and GDR.

Industry Overview
Iron is a common mineral on the earths surface. Most iron ore is extracted in opencast mines in Australia and Brazil, carried to dedicated ports by rail, and then shipped to steel plants in Asia and Europe. Iron ore and coking coal are primarily shipped in cape size vessels, huge bulk carriers that can hold a cargo of 140,000 ton or more. Sea freight is an area of major concern for steelmakers today, as the high demand for raw materials is causing backlogs at ports, with vessels delayed in queues. Since the World War II, the steel industry has experienced three distinct phases- growth (1950-73), stagnation (1974-2001) and boom (2002-2006). The demand for steel grew at an annual rate of 5.8% during 1950-73 as the industrializing nations were building their civil infrastructure. The oil shocks of 1973 through 1979 slowed consumption in the second phase. The production of crude steel grew at 0.6% p.a. over the entire period. Steel prices declined by 2-3 % p.a. During 1999-2001 the industrys overcapacity hovered near 25% globally. Only a few companies were able to sustain. Since 2002 the annual steel production has grown at 7-8% driven almost entirely by the double digit growth in China. The huge demand from china has caused a commensurate leap in steel prices. The industry has experienced a drop in the over capacity from 23% in 2001 to about 17% from 2003-2005. But the demand from China has also witnessed a structural change. From 2002-2004 Chinas capacity for producing crude steel increased on average by 55%. By 2005 China became a net exporter of steel. In the first half of 2006 China overtook Japan, Russia and the EU 25 to become the worlds largest steel exporting country.

Tata group

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Tata Steel Expanding Beyond Boundaries Tata group was founded as a trading firm in 1868 by Jamsetji N tata. Throughout its 139-year history, the Tata Group had evolved alongside the Indian economy in its growth and the changing portfolio of its constituent companies. The house of Tata was at the forefront of developing industries in India, opening the countrys first luxury hotel in 1903, first private steel company in 1907, and first airline in 1932, and first software firm in 1968. The companys commitment to India was also reflected in its charitable contributions. Tata Sons, a promoter company which served as the groups holding company, was 66% owned by two charitable trusts, which funded programs in education, medicine, the arts, scientific research, and economic development.The Tata Group portfolio expanded greatly during the 53 years when J.R.D. Tata served as chairman from just 13 companies in 1938 to 300 in 1991. J.R.D. Tata encouraged group companies to be independent and entrepreneurial in their expansion. As a result, the businesses of many group companies overlapped.

When Ratan Tata, took over as chairman in 1991, his first priority was to improve the competitiveness of operating companies and streamline the group portfolio. After working to help revamp the groups struggling Steel and Motors companies, the Tata portfolio was scrutinized carefully. Some operating companies were divested while the others were organized around seven sectors: 1. Information systems and communications; 2. Engineering; 3. Materials; 4. Chemicals; 5. Consumer products; 6. Energy; 7. Services. Through the 1990s, the group worked to make each of its businesses economic value-added (EVA) positive. The Group developed brand equity scheme, under which group companies were required to pay for the use of the Tata brand. The proceeds were used for umbrella promotion of the group. Ratan Tata also sought to increase Tata Sons stakes in group operating companies from small minority shares to at least 26%, giving the group veto rights over any potential takeover of an operating company.

The Tata Groups collective revenues is 70.9 billion in FY 2008-09.

Year Total revenue 2008-09 (US $ billion) 70.9 2007-08 (US $ billion) 62.5 % change 13.4

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Sales

70.1

61.5

14.0

Total assets

51.7

44.1

17.2

International revenues

45.9

38.3

19.8

Net forex earnings

2.1

1.2

74.2

Tata Steel
TISCO is Indias largest manufacturer of steel in private sector currently and was set up during 1907. Jamsetji Tata had started his quest for steel way back in 1882 but it was twenty-five years later, in December 1907 that the explorers found their way to Sakchi - at the confluence of the rivers Subarnarekha and Kharkai. On 27th February 1908 when the first stake was driven into the soil of Sakchi the dream had come alive. When Tatas issued shares on 26th August 1907, for the first time in the financial history of the country. The Tata family contributed 11% shares of the Tata Iron and Steel Company Limited. In 1908 the plant became functional and the next year, in 1909 the blast furnaces, steel furnaces, coke ovens, powerhouse and machine shops were laid down. Land for the site, mines and quarries were acquired in 1910. The Government contributed their bit by connecting railway to Gorumahisani. The first steel ingot was rolled on 16th February 1912. The last decade of the twentieth century happened to be a very hectic period of self-renewal and growth for Tata Steel. An extensive technological overhaul, several improvement projects, cost control measures, optimising IT support and a strong customer-centric approach had help Tata Steel to reach the coveted efficient steel maker of the world. At the turn of the millennium, Tata Steel had earned the complete trust of the whole wide world and emerged as a strong entity in the global steel industry. The last decade has been marked by Tata Steels prominent role in the overall development of the country. Intense strategic thinking about future expansions, plans for organic growth and initiation of new projects are a few highlights in Tata Steels expanding and more penetrative roles in the larger perspective. The acquisition of NatSteel in 2004 was Tata Steels first overseas acquisition and the 6 ePGP-02-078

Tata Steel Expanding Beyond Boundaries series of joint ventures and mergers that followed found a peak when the acquisition of Corus, happened in April 2007. 1. Tata Steel started a Joint venture with Blue Scope Steel Ltd., Australia for quoted steel manufacturing facility in July 2005. 2. Tata Steel acquired stakes in the Australian coal mines (Carborough Downs )on 21st July 2005. 3. On 14th December 2005, Tata Steel signed Definitive Agreement with Cementhai Holding Company to acquire shares and invest equity in the Milennium Steel, Thailand 4. Integration of Tata Steel and Corus was accomplished at US $ 12 billion, making Tata Steel one among the top ten steel producers globally and the second-most geographically diversified steel producer in the world on 2nd April 200 5. Tata Steel signed an MoU with Vietnam Steel Corporation (VSC) on 29th May 2007, to establish a steel complex in Ha Tinh province, over a period of ten years. 6. Tata Steel signs Joint Venture with Riversdale Mining for Mozambique coal project in 2007. 7. Tata Steel Joint venture started in Ivory Coast for mount Nimba (West Africa) Iron Ore in 2007. Tata Steels profitability ranks among the best in the industry. It posted comparatively good results for the year ended March 06. Consolidated sales grew at 26% to Rs 20,244 crore. Operating margins were a robust 31% in fiscal 2006. Consolidated profits for the year stood at Rs 3,721 crore, an increase of 4%. It bought NatSteel in 2004 for Rs 1,313 crore and Millennium Steel for Rs 675 crore in 2005. In 2006 Tata Steel was ranked once again the best steel making company in the world by World Steel Dynamics Inc. USA (WSD) based on a study of 22 world class steel makers -consecutively for the second time.

Tata Steel- Pursuing International Expansion Opportunities

Till the liberalization policy the companys margins were assured, and it faced little competition, particularly because of the high duties imposed on imports. Post liberalization, through the 1990s, Tata Steel worked to improve its competitiveness. The company began benchmarking its costs against those of world-leading steel companies, improved production efficiencies through waste reduction and new technology, and revamped its sales and marketing operations. Tata Steel also reduced its workforce graduallybut dramaticallyfrom 78,000 in the early 1990s 7 ePGP-02-078

Tata Steel Expanding Beyond Boundaries to 48,821 at the end of FY 2000-01. In 2001-2002 steel prices were at historic lows however the company set out to become EVA positive, a goal which it accomplished the very next year and in successive years. In 2003, Tata steel initiated a broader strategic evaluation of Tata Steel to develop a vision for the companys future direction. As a result of this process, Tata Steel planned to grow in India and overseas through six connectors that could turn the India focused 3 million-ton capacity Tata Steel of 2003 into the much larger and more global player within 10 years. 1. Domestic expansion - Tata Steel would expand production in India in Jamshedpur and in Greenfield developments elsewhere.Target is to increase the production by four million tonnes per annum till 2015 and to reach about 30 million tonnes plus, beyond the shores of India, multinational, and continuing to be in a low-cost position and continuing to be EVA positive 2. De-integrated strategy supplying India-sourced raw and semi-finished materials to finishing facilities closer to consumer end-markets. Acquiring the steel business of Singapore-based NatSteel Asia in February 2005 and Millennium Steel, Thailands largest steel company, in April 2006 enabled Tata Steel to pursue this strategy in Southeast Asia. The acquisitions also gave Tata Steel an increased presence in Australia, Malaysia, the Philippines, Vietnam, and, importantly, China, where per capita consumption of steel was more than six times greater than in India. 3. Mature market M&A - Acquiring companies in more advanced markets would enable Tata Steel to improve its research and development capabilities, as well as its operating practices. 4. Raw materials security with mines rich in iron ore and coking coal, Tata Steel was able to source the vast majority of its own raw materials, helping to insulate the company from global price fluctuations. The companys vertically integrated operations made it the worlds lowest cost steel producer. As it grew, the company acquired additional sources of raw materials outside India. 5. Downstream products - Tata Steel moved into value-added product segments and became the first Indian company to sell branded steel products. The company established a $262.6 million joint venture with BlueScope Steel of Australia to produce construction and building material-related steel products, primarily for sale in South Asia. 6. Logistics control - The Company established a joint venture shipping company with NYK Line of Japan. During this period Netherlands-based Mittal Steel which was founded in India by entrepreneur Lakshmi Mittal and grew through international acquisition merged with Arcelor of Luxembourg, creating a combined entity that was by far the worlds largest steelmaker, with nearly four times the production volume of its nearest competitor. This triggered consolidation of the global steel industry and gave the Tatas the stimuli for acquisition of Corus. SWOT Tata Steel 8 ePGP-02-078

Tata Steel Expanding Beyond Boundaries Strengths Lowest Cost Producer in world Experience of TATA group in doing global acquisitions Stable balance sheet( Low debt to equity ratio)
Opportunities

Weaknesses Corus was triple the size of TATA steels in terms of production

Consolidation trend in Steel Industry CSNs tarnished image after failure of 2002 negotiations To get exposed to the global steel market ( will save time and learning space for them)

Threats Brazilian player CSN Russian player No committed financers to support the possible deal Severstal

The Corus acquisition catapulted Tata Steel from the 56th to the 6th largest steelmaker in the world. It required an up-front financial contribution from Tata Sons on a different order of magnitude than any previous foreign acquisition by a group company and exposed the company to new opportunities and risks. Corus, which considered itself not just a steelmaker but a global supply chain services business, gave Tata Steel an instant major presence in European markets and in higher value-added product segments, particularly serving the automotive and construction sectors. Through the Corus acquisition, Tata Steel sought to extend the de-integrated model developed through the NatSteel and Millennium Steel acquisitions. Realizing this goal would take time for Tata Steels planned greenfield and brownfield expansions in India to come online, analysts noted. Tata Steel anticipated that the combined entity would save $450 million in production, procurement, financing, and other synergies over the first three years after the acquisition. The acquisition presented a number of challenges for Tata Steel. Corus have very slight profit margins, so Tata Steel would need to work with the management to improve operating efficiencies. This was a particular imperative because the combined entity would be much more vulnerable to fluctuations in steel and raw material prices since Corus was not integrated nearly to the same extent as Tata Steel. Before the acquisition, Tata Steel supplied 80% of its own raw materials; the combined entity could only provide 17%, though that figure was expected to rise as Tata Steel completed its planned facilities in India. The interest burden from the leveraged transaction was another concern for analysts. One analyst estimated in April 2007 that given this burden, the combined company would face losses if steel prices fell 10-11% from their levels at the time. The acquisition was viewed more positively by some analysts in mid-2007 in light of higher prices in Europe during 9 ePGP-02-078

Tata Steel Expanding Beyond Boundaries the first half of the year. A 10% increase in steel prices in both FY 2007-08 and FY 2008-09, another analyst noted, could enable Tata Steel to pay off its Corus-related debt almost entirely within two years.

Tatas were successful in opening up new markets with de-integrated strategy by supplying raw material from India and finishing done at consumer ends in steel business. Besides south east Asia, the presence of Tata Steel market in China helped them as Chinas per capita steel consumption was much higher. The Corus acquisition gave TISCO an entry to European markets and move up the value chain by providing high value add steel in automotive and construction industries.

Conclusion
Tata steel uses a transnational strategy using its de-integrated strategy by applying customization at the end of product chain (deferred) at locations in Singapore and Thailand using its acquired companies NatSteel and Millennium Steel. The strategic value chain which it use on Corus remain to be seen and probably would stand separate to cater high value added steel to automotive and construction industries. As commented by Tata group chairman, Mr.Ratan Tata on Corus acquisition, I believe this will be the first step in showing that Indian industry can in fact step outside the shoresof India in an international marketplace and acquit itself as a global player. The first decade of post liberalization gave an opportunity to Indian companies explore the possibilities outside India.

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