TATA STEEL 1

Globalization Strategy

TATA STEEL
GLOBALIZATION STRATEGY
(CORUS ACQUISITION)

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Executive summary
Following is the executive summary for the TATA Steel industry:

 The Indian steel industry had weak substitutes, moderate buyer‟s bargaining power and

new entrant‟s threat, strong supplier power and intense rivalry between the companies in

the industry. Overall the steel industry is a competitive one to be in.

 TATA Steel achieved cost leadership in order to compete in the industry and also deal

with reduced steel prices. However the cost leadership they achieved was through

„comparative advantage‟ rather than „competitive advantage‟. The comparative advantage

was mainly due to preferential access to raw materials, cheap labor and integrated

manufacturing facility

 The CORUS acquisition was definitely a right step towards an attempt to achieve

economies of scale and enter the global arena. However, the premium that TATA paid in

order to acquire CORUS and the economy downturn in 2007-08 resulted in a huge set-

back to the company.

 The outlook of the future of this industry is going to be a fruitful one for TATA Steel

provided it leverages synergies across the two companies by exploiting each of their

respective strengths like technical knowledge, advanced R&D and operational

efficiencies.

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The Indian Steel Industry

The establishment of TISCO in 1907 was the starting point of the modern steel industry in India

(Refer Exhibit 1 for the detailed timeline of the TATA Steel history). Till early 1990‟s, the steel

industry continued to be in the controlled regime but liberalization has changed the rules of the

game and now the Indian steel industry is largely integrated with the global steel industry. For

the year ending 2006, India produced 49.45 million tonnes of steel and had a 3.96% share of

world production. On the consumption side, India‟s per capita consumption of steel stood at 42.2

Kg against the world average of 202.2 Kg.

Steel Industry Analysis

Industry Definition: The global steel industry is defined as market for iron based products such

as crude steel, pig iron and direct reduced iron.

Time Period: This analysis of the structure of the steel industry is prior to CORUS acquisition.

Players: The key players in the market were Mittal, Arcelor, Nippon Steel, POSCO and JFE

(See Exhibit 2 for respective market shares). TATA Steel is ranked 56th in terms of global market

share.

The top 15 companies catered 1/3 rd of the market and the remaining two-thirds of the supply

was widespread amongst the smaller players. This shows that the structure of the steel industry is

highly fragmented, which has been one of the key reasons for the inability of the industry to

attune its supply and demand.

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Suppliers: A key raw material in production of Steel is Iron Ore. Globally, top 3 mining giants

BHP Billiton, CVRD and Rio Tinto supply nearly 2/3 of processed iron-ore to steel mills. In

steel industry, a fully integrated steel plant with access to own mines of key raw materials like

iron-ore is a key a source of competitive advantage.

Buyers: Steel finds applications in various industries and as a result the buyer‟s base for the steel

industry is large. Major buyers include construction, automobile and the manufacturing sector.

Figure1. Forces Driving Competition in the Global Steel Industry

Supplier’s Bargaining Power: (Strong)

 The key inputs for steel production are iron ore and metallurgical coal. These raw

materials cost approximately 20% of the price of the end product. The costs of these input

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factors are largely set by competitive forces beyond the control of the players in the steel

industry

 Globally, the top three mining giants BHP Billiton, CVRD and Rio Tinto supply nearly

two-thirds of the iron ore which gives them substantial negotiation power

 There are no viable substitutes to iron-ore and coal in the steel production process. While

EAF method of steel production can be looked as an alternative, it‟s a distinct production

process by itself and requires significant capital outlay

 Backward integration is a possibility in the steel industry, but iron-ore and coal resources

are finite and there are problems in mining sufficient amount of it

 Steel companies usually tend to enter into long term contracts with suppliers which lead

to high switching costs for the steel companies which in turn makes the supplier

bargaining power even stronger.

Buyer’s Bargaining Power: (Moderate)

 Large-scale consumers of steel negotiate directly with the steel companies. These

consumers tend to have relatively higher bargaining power than others. However

there are also several small and retail consumers of steel who doesn‟t have the same

advantage

 Though producers tend to differentiate themselves by value addition and selling

specialized steel products, Steel is still a commoditized product. There is not much of

true distinction between the different competitors. This makes the consumer price

sensitive
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 Backward integration into steel production is not an attractive proposition to steel

buyers, but many steel producers do forward integration into certain types of

businesses. For e.g. Tata Motors or Nippon‟s engineering and construction business.

New Entrants Threat: (Moderate)

 Steel production is a capital intensive business requiring huge outlays. The

infrastructure set-up costs are too high for any new players to enter into this business

 Steel industry still enjoys high protectionism within the country borders. A case in

point is china which uses a number of strategies to ensure that the local players are

competitive in the domestic market

Threat of Substitutes: (Weak)

 The potential substitutes for steel are fiberglass, aluminum and plastic. However these

substitutes can‟t replace steel – which is the main raw material - in most of the

production processes that use steel.

 The lesser number of alternatives that are available do not offer the same performance

and hence overall the threat from the substitutes is weak.

Rivalry among Existing Players: (Strong)

 Heavy exit barriers and inability to divest provides a strong motivation for the players to

remain in the industry even when market conditions are not conducive

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 Steel making has a high fixed cost, making economies of scale a key factor for

profitability. Steel companies engage in intense competition to gain market share either

through organic expansion or through consolidation

Identification of Tata Steel’s Strategy

In the Context of above Industrial Structure, Tata‟s Steel Strategy since 2001 can be broken into

2 parts

 Attaining Cost leadership in Indian Market

 Creating economies of Scale through global expansion and exploiting the inter-

dependencies among the global market to further extract competitive advantage

Figure2. TATA Steel’s Vision 2012

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Analysis Tata Steel’s Strategy

Attaining Cost Leadership in Indian Market

Even prior to 2001, Tata Steel embarked on its objective of achieving cost leadership in the local

market. The economic reforms of 1991 de-regulated the steel prices in India and Indian markets

were opened to imports, pushing down the price of steel. With reduced steel prices it became

imperative for Indian steel producers to achieve cost efficiency to maintain profitability.

Cost Leadership

In cost leadership, a firm sets out to become the low cost producer in its industry. The sources of

cost advantage are varied and depend on the structure of the industry. They may include the

pursuit of economies of scale, proprietary technology, preferential access to raw materials and

other factors. A low cost producer must find and exploit all sources of cost advantage. If a firm

can achieve and sustain overall cost leadership, then it will be an above average performer in its

industry, provided it can command prices at or near the industry average.

The graph below shows the TATA Steel‟s performance as compared to the overall market. Prior

to the acquisition of CORUS, the graph indicates that TATA Steel‟s performance was above

average, mainly due to cost leadership. With Corus acquisition in 2007, TATA Steel was aiming

to achieve low cost leadership worldwide.

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Figure3. TATA Steel’s strategy

However, the steel industry is highly cyclical, receptive to general economic conditions and

reliant on number of other industries including the automotive, appliance, construction and

energy industries. Post CORUS acquisition, as the graph indicates, TATA steel‟s performance

was below the market average due to global economic recession. The subprime crisis and the

subsequent economic tremor in the developed countries made TATA Steel‟s position vulnerable

due to CORUS.

Figure4. TATA Steel’s Performance as compared to BSE Sensex

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Tata Steel‟s cost leadership in Indian market heavily depended on

 Exploiting its preferential access to raw materials because of its integrated manufacturing

facility

 Modernization and expansion of production capacity

In 1991, Tata steel embarked on an ambitious modernization plan focused on increasing its

capacity base and reducing Cost of production (See Exhibit 3 for “Modernization and Capacity

expansion road map for TATA Steel”). The modernization and capacity expansion cost Tata

Steel Rs 10,000 crores. Achieving Cost leadership in Indian market looked particularly attractive

for Tata Steel as India is a country with lowest steel production cost

Table 1: Comparative cost of steel production across countries

But as the table points out, the main advantage for steel production in India comes from its

cheap labor cost and inexpensive raw materials so in a sense it was comparative advantage

and not competitive advantage. While this made India attractive from cost perspective, there

was another dimension that dampened the comparative advantage of India

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Table 2: Major determinants of International Competitiveness

Though India had a lower cost of steel production, the productivity of labor in India was low. So

even after beating POSCO in 2001 to become the lowest cost steel producer, labor productivity

for comparable capacities as of 2001 was 100 t/man year for Tata Steel vis-à-vis 1345 t/ man

year for POSCO.

Creating Economies of Scale through Global Expansion

Achieving Economies of Scale became particularly necessary for Tata Steel as they had a higher

% of fixed cost to Total Cost. Recent modernizations and capacity expansions also meant

increased pressure on effective utilization of assets. All these forced Tata Steel to focus on

volumes

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Table 3: Fixed Cost as a % of Total Cost (FY 2001)

In achieving economies of scale Tata steel had to look for overseas market as the consumption of

steel in the local market was still below the global average (See Exhibits 4 and 5 – „Consumption

of Steel across Countries‟). Further, The Ninth Five year plan projected the demand for steel as

of 2002 to be at 38 million tones , Steel companies working on these projections invested heavily

and by 2002 India had an installed capacity of 35 million tones, but actual demand was at 29.5

Million tones, leading to excess capacity in India. Another factor that made it attractive for Tata

Steel to look at global markets was the homogeneity of steel demand across markets and also the

fact that consumer‟s of steel had global operations. In a sense Tata Steel‟s decision to go global

in 2004 was a “market –seeking activity”. But at the same time Tata Steel was also trying in

Porter‟s words “extend competitive advantages by coordinating interdependencies among

markets”. Porter (1986) recognizes the interdependency among various country markets and

contends that a global strategy has two basic dimensions: configuration of value-adding

activities and co-ordination of the activities across markets.

However in 2006, the events that happened were dramatic in Steel Industry. Mittal and Arcelor

steel, who were No 1 and No 2 in the global steel industry merged to create a global No 1 in steel

industry with 10% of global steel production capacity. The industry had entered into a
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consolidation phase and focus was also on developing economies like India where steel

companies were becoming important take-over targets. Tata Steel was particularly vulnerable

because of the low percentage of promoter‟s holding (Refer exhibit 6 – „Shareholding Pattern As

Per Clause 35 as on 30th June, 2005‟). Tata Steel understood that the days were numbered for

marginal players, So In 2007 in a daring move, Tata steel acquired the 5th largest steel producer

for an estimated price of Rs 55,000 crore in cash. With Corus acquisition, Tata Steel had added

21.4 million tones to its capacity.

Primary reason for Corus acquisition being

 Becoming a global player in an increasingly consolidating industry

 Achieving economies of scale and economies of scope

In both the cases, Tata Steel‟s intention had been to expand into places where end-user customers

exist and take-over companies which can benefit from low cost supply of raw materials from

India. Corus acquisition gave Tata Steel an inroad into the European markets, whereas NatSteel

gave Tata an inroad into developing economies like China. Both NatSteel and Corus can be

potential beneficiaries of low cost raw material supplies from India.

Effectiveness of Tata Steel’s Cost Leadership and Globalization Strategy

Cost advantage, because of specific endowments in a country like cheap labor cost or access to

cheap raw materials, no doubt surely should be exploited. However they can‟t be a source of

sustainable cost advantage independently (for e.g. Software industry in India). Cost leadership
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through comparative advantages can be imitated by competitors and companies should at earliest

work to utilize the comparative advantages to create other systems that can further enhance their

cost leadership position on a sustainable basis. The following are some of the key measures

through which TATA Steel can effectively utilize the diversification strategy to gain competitive

advantage instead of comparative advantage:

 Prior to the CORUS acquisition, there were antidumping laws (trade barriers) that did not

allow TATA to enter U.S and European market. The acquisition provided TATA Steel a

springboard for entry into the European market, and higher value qualities of steel

 Low technological advancement was primary reason for the low labor productivity in

India. With the acquisition of CORUS, which had one of the best technological

knowledge and followed best practices, TATA Steel could effectively leverage the

Corus‟s technological resources to increase the labor productivity.

 Strong R&D department in CORUS along with its 81 patents is another asset that TATA

Steel can benefit from in order to develop higher quality steel.

 World steel consumption is expected to double in the next 25 years and with this

acquisition will position TATA Steel to be a strong competitor to meet the upcoming

demand. Moreover, Quality improvement of Indian steel combined with its low cost

advantages will definitely help in substantial gain in export market.

 Due to various compounding reasons like raw materials deficiency, finite iron ore

deposits and their corresponding mining difficulties along with insufficient freight

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capacity and hindering transport infrastructure, TATA Steel would not have become a

global player without the acquisition.

 Though CORUS was the 8th largest steel industry, it was struggling to maintain profit

margin because of its high operational costs. TATA Steel can implement its low cost

leadership skills to make CORUS a profitable venture.

 China and other South East Asian economies were the largest consumers of steel

products. TATA Steel had a very strong distribution and retail network in these countries.

TATA Steel can leverage these networks to build an inroad for CORUS in these

emerging markets.

 CORUS was debt ridden with low margins and was an expensive acquisition to the

TATA Steel especially because of CSN intervention. Also a downturn would have made

it vulnerable which is what was reflected in the performance of the stock shown above.

On the global expansion Front, Tata Steel has been facing gaps in strategy execution as they

failed in their ability to extract synergies from one of their Corus acquisition (Refer Exhibit 7).

Tata Steel has not able to realize the “claimed synergies” of Reduced cost of Indian steel

production through R&D transfer from Corus or the more important factor of making Corus

production more profitable through access to cheaper raw materials.

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Implementable Conclusions

Through our study, we can identify the following actions as beneficial to the TATA CORUS

acquisition strategy:

1) Enhance labor productivity to increase steel production from existing capacities by leveraging

technological advancements from CORUS. This would help address deficit as well as labor

productivity in supply of cheap raw materials to global production facility.

2) Leverage R&D expertise from CORUS to enhance the product-mix which in turn will yield

higher margin products.

3) Forward integration into sectors such as housing, automobile. Even though this is happening

in the Indian market and to a certain extent even in European market through Jaguar acquisition,

there needs to be more traction in this area

4) The two companies can benefit from having the same „cultural fit and similar work practices‟.

Best practices and operation efficiencies can be adopted with ease across the company due the

above benefit mentioned.

5) Acquire access to cheap raw materials through Greenfield expansion in India and abroad to

further strengthen its position in cost leadership.

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Exhibit 1: Time Line of TATA Steel

1907: Tata Steel was established by Indian Parsi businessman Jamsetji Tata in 1907

1924: Manufacture of Steel by Duplex Process commenced.

1935: Production of high-tensile steel commenced.

1940: The new 100-Tonne Blast Furnace started operation.

1961: An industrial license is obtained by Tata Steel for an Alloy-Steel project in July.

1963: The government approves in principle expansion by One-Million tons during the 4th Plan.

1965: The Steel Ministry agrees to expansion to 4-Million Ingot tons with a Strip Mill.

1974: Amalgamation with West Bokaro Limited for coal mine operations.

1979: Five-year Rural Development programme for upliftment of the villagers near Jamshedpur

takenup.

1981: Ratan was named Chairman of Tata Industries; the Group's other holding company, where

he became responsible for transforming it into the Group's strategy think-tank and a promoter of

new ventures in high-technology businesses.

1985: JRD Tata becomes Chairman Emeritus after guiding Tata Steel as Chairman for 46 years.

Russi Mody takes over as new Chairman. Merger of the Indian tube company with Tata Steel.

1986: Started an export cell which co-ordinated the Company‟s growing exports.

1991: In 1991, Mr Ratan N Tata took over as group chairman from J.R.D. Tata, pushing out the

old guard and ushering in younger managers. Since then, he has been instrumental in reshaping

the fortunes of the Tata Group, which today has the largest market capitalization of any business

house on the Indian Stock Market. Dr JJ Irani becomes Managing Director.

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1993: The new One-million ton capacity "G" Blast Furnace was commissioned.

1997: The Company sold the 67.5 MW Power Plants, under construction at Jojobera, put under

its earlier Modernizations Programme-Phase III, to Tata Electric Companies for a total

consideration of Rs. 300 crore. Received Prime Minister‟s trophy for the Best Integrated Steel

Plant for the year 1995-96. Dr JJ Irani was conferred an Honorary Knighthood by the Queen of

Great Britain.

2000: Mr. Tata was honored by the Government of India with the Padma Bhushan on 26th

January 2000, on the occasion of the 50th Republic Day of India.

2001: Company was recognised as the world's lowest-cost producer of steel.

2004 : Tata Steel entered into definitive agreements with Singapore based NatSteel Ltd to

acquire its steel business for Singapore $486.4 million (approximately Rs 1,313 crore) in an all

cash transaction.

2005: Tata Steel acquired 40% Stake in Millennium Steel based in Thailand for $130 million

(approx. Rs 600 crore). The company was also recognised as the world's best steel producer by

World Steel Dynamics.

2007: On January 31 2007 Tata Steel won their bid for Corus after offering 608p per share,

valuing Corus at £6.7 bn ($11.3bn); as a result and pending acceptance and completion of the

takeover, the joining of the two will create the fifth largest steel company in the world. Tata Steel

through its wholly owned Singapore subsidiary, NatSteel Asia Pte Ltd acquired controlling stake

in two rolling mills: SSE Steel Ltd, Vinausteel Ltd located in Vietnam.

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Exhibit 2: Steel Industry prior to Corus acquisition

Steel Industry prior Corus acquisition Steel Industry post Corus acquisition

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Exhibits 3: Modernization and Capacity expansion road-map for Tata Steel

1990-94

o The highly automated G blast furnace was installed with special charging and
distribution system.
o LD Shop 2 with 130 tonne capacity LD vessels was set up.
o Two single stranded slab casters were installed.
o A semi-continuous Hot Strip Mill was introduced.

1995-1999

o The hot metal capacity was raised to 3 million tonnes per annum, crude steel
capacity to 3.5 mtpa and saleable steel capacity to 3.2 mtpa.
o One ladle furnace each was added to LD1 and LD2.
o The 3rd single strand slab caster and 3rd converter were installed.
o Continuous Casting was increased to 95% from 65%.
o The Hot Strip Mill capacity doubled to 2 million tonnes.

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Exhibit 4: Consumption of steel across countries

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Exhibit 5: Consumption of Steel across countries.

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Exhibit 6

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Exhibit 7

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References:

1. http://www.kwrintl.com/library/2006/OverviewOfGlobalSteelIndustry.htm

2. http://hbswk.hbs.edu/item/5634.html

3. http://www.worldsteel.org/pictures/newsfiles/WSIF06.pdf

4. http://www.nytimes.com/2007/02/09/your-money/09iht-minvest10.4538252.html?_r=1

5. http://wadias.in/site/arzan/blog/tata-an-indian-company-wants-to-be-everywhere/

6. Strategies for sustainable Turnaround of Indian Steel Industry – S. Mitra Mazumder, Associate

Member T Ghoshal, Non-member

7. DataMonitor Reports on Global Steel Industry for the year 2003,2004,2005,2010

8. Public Enterprises, Government Enterprises and Impact on Competition – Indicus Steel

9. Data from www.tatasteel.com

10. Mittal Steel – Arcelor, The Natural Alliance, Exane BNP Paribas – European Seminar 2006

11. Beyond Steel, February 2007 by BCG consulting

12. Michael Porter, “On Competition”

13. http://www.scribd.com/doc/9155197

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