TATA STEEL - AN ADAPTIVE ORGANIZATION - S. Subramanian
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Volume 5 Number 1 ISSN : 2229 - 6743
TATA STEEL - AN ADAPTIVE ORGANIZATION
S. Subramanian1
ABSTRACT
Steel is an old industry and hence not expected to have dramatic
changes in its structure or technologies. Hence the steel companies
were also generally not prepared to face such shocks. But Tata Steel,
India’s oldest private sector integrated steelmaker, faced many such
life threatening situations between 1991 and 2013. It had overcome
three such scenarios successfully. In 2007, the company acquired the
British-Dutch Steel maker Corus, which was five times bigger than
itself in revenue terms. Within a year of acquisition, the steel demand
fell sharply in Europe, which severely affected the financial
performance Corus seriously. Tata Steel also had other problems like
poor efficiency at the European Plants, burgeoning debt and lack of
integration between Indian and European operations. As on 2013
the company was struggling to turnaround the European operations
which in turn resulted in overall loses.
Keywords:
Adaptive Organization, Turnaround Management, Tata Steel, Steel
Industry, Merger & Acquisitions, Emerging Market Multinationals.
Introduction
Tata Steel, the century old Indian steel bellwether, was facing a major problem as
on 2013, as it struggled to cope up with falling demand situation and poor
productivity in its European operations. Turning around Tata Steel Europe (TSE),
which was earlier known as Corus, became a major challenge for the new
Chairman Cyrus Mistry, who had taken the reins of the group in December 2012.
Tata Steel acquired Corus in 2007, at the peak of steel demand cycle, at a relatively
very high price according to analysts. Within two years, the global economy fell
into recession, pulling down the European steel market along with it. This resulted
TSE getting into losses, which in turn was effectively dragging the overall
performance of Tata Steel Group. The initiatives taken by the top management had
not yet streamlined the financial performance and analysts were predicting no
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Tata Steel - An Adaptive Organization
immediate recovery of European steel market. But the patience of Tata Steel
investors might run out soon.
Tata Steel – Till Nineties
Tata Steel, which was known as Tata Iron and Steel Company (TISCO) till 2005,
was formed in 1907. It was a part of Tata Group, one of India’s largest and oldest
business conglomerates. It started steel production in 1911 in Jamshedpur (now in
Jharkhand State in North India) and went public in 1917. TISCO was Asia's first
integrated private sector steel company. The company had captive mines for the
raw materials used in steel production including coal, iron ore and other minerals.
The growth of TISCO was gradual and consistent till seventies. In the eighties, the
company diversified in to businesses like bearings, tubes etc as the government
controls did not allow it to grow in its core business of steel. The company had 18
subsidiaries in eighties and all of them were located in Jamshedpur. TISCO was
always ranked among India’s top companies till eighties in terms of its financial
performance.
The Indian steel industry was a highly protected one until the year 1991. New
capacity additions were reserved for public sector units and the Government of
India controlled prices and distribution. There were only two major integrated steel
producers, namely the Steel Authority of India (SAIL), owned by Government of
India and TISCO. Due to restrictions on capacity additions, there was shortage of
steel in the country as the demand exceeded the supply. In such environment,
TISCO was able to sell whatever it produced. Hence the company concentrated
only on distribution and ignored other issues like cost control and product
promotion.
Problem of early nineties- Outdated structure & technology and lack of focus
Indian government started introducing measures to liberalize steel industry since
1991 and by mid 1990s almost all the controls were gone. This led to the addition of
new steelmaking capacity in the private sector, particularly in secondary steel
sector. This in turn transformed the Indian steel market from a duopoly to a highly
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competitive market place. New players like Jindals, and Ispat entered the market
with their own steel making units that were equipped with the latest technology.
In 1991, Steel making in TISCO was still done through the traditional and
outdated open-hearth process; its youngest blast furnace was about 33 year old.
The steel productivity was at 80 tons of ingot steel produced per man year against
the 400 tons per man-year in South Korean steel plants. The productivity at SAIL,
i
the other Indian primary steel producer was 105 tons per man year .
The company’s organizational structure was also unwieldywith around 30 layers
in its organizational hierarchy. This in turn made the decision making process very
slow. Further, due to the licence raj regime, the company had diversified a lot and
had 18 subsidiaries ranging from steel related business to engineering business.
Almost all the subsidiaries were making losses. Besides, some of the subsidiaries
were in same area of operation and competed against each other. For example,
there were three companies which were making refractories (Ipitata refractories,
Tata refractories and TISCO itself), resulting in avoidable duplication.
Analysts commented that the company resembled a merchandise store, producing
and selling a wide variety of steel products, at the cost of economies of scale, both
at the production as well as in market. TISCO’s product mix was very poor. Only
half of the crude steel produced was used to produce high margin downstream steel
products. The rest was sold to steel re-rollers as ‘semis’, which were of low margin.
In the financial year 1991-92, TISCO made a profit of INR (Indian Rupee) 2.78
billion of which only INR 0.69 billion was from the company’s net sales of INR
26.86 billion in steel business. The rest came from ‘other income’ including
dividends and interest earnings.
In addition to these operational issues, TISCO was also besieged by problems at
Ii Business Today 1992. Going for a new mould. November 22, 50-53.
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the board level as Chairman Mr Rusi Modi and Vice Chairman Mr Ratan Tata had
difference of opinions. Given the plethora of problems faced by the company,
many analysts had predicted that TISCO would be the first casualty of the
ii
liberated steel regime of the 90s .
Overcoming the Problems
TISCO’s management realised these problems quickly. In November 1992, the
company’s then newly appointed Managing Director Mr. JJ Irani unveiled a new
vision for the company that focused on quality and customers. It read:
“Tata Steel dedicates itself to Total Quality. We shall constantly strive to be a
supplier of World Class goods and services, by anticipating and exceeding the
expectations of all our customers. Continuous improvement, teamwork,
commitment and credibility will be our guiding values”
First the board problems were sorted out with the removal of Mr.Rusi Modi and
Mr.Ratan Tata became the Chairman of the company. Subsequently the company
adopted the following strategies to overcome the weakness.
Concentrating on the core business of steel
In 1994, the company decided to focus on its core steel business and all the non-
steel businesses were sold off. The cement division was sold to France based
multinational cement major Lafarge. The captive power plant was sold to the sister
power companies from Tata Group. TISCO’s stake in Tata Timkin was sold to the
iii
US partner Timkin . The infotech division was also hived off. The other steel
related business subsidiaries were delinked from the main steel business by
creating seven new profit centers. These profit centers were to be governed by their
respective company boards and required to become sustainable on their own over a
period of ten years.
ii Business India 1995. Seize the day, ‘, September 12-25, 98-101.
iii "www.equitymaster.com 1999. Restructure, core competency is the latest mantra at Tisco. January 8, retrieved
from http://www.equitymaster.com/detail.asp?date=01/08/1999&story=1&title=Restructure-core-competency-is-
the-latest-mantra-at-Tisco on 20th Nov 2013."
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Modernization and Moving up the value chain in terms of the product-mix.
iv
The downstream products in steel industry typically carry higher margins . But
TISCO’s presence in this segment was very marginal in early nineties. To
overcome this short-coming, the company directed its new investments towards
downstream values added products, particularly the flats. The modernization in
1996-98 periods increased the capacity of the flat products to 2 MTPA (Million
Tonnes Per Annum). These moves helped to tilt TISCO’s product mix towards
more profitable products.
Organization restructuring and right sizing
As noted earlier, as a typical old manufacturing company, TISCO had several
layers in itsorganizational hierarchy. The company went restructuring, and with
the help of consultants like Mckinsey, it was able to bring down the number of
layers to 11 from 30. Besides, the IT facilities like intranet and email were also
introduced to ease flow of communication between the layers. The over sized
manpower (78,000 employees in FY 1992-93) was another majorissuethat TISCO
had to tackle. The firm gradually reduced the number of employees in its payroll
through voluntary separation schemes and by 1998, the company was just 55,000
strong, thirty percent lower from its peak in 1993.
Customer orientation
Given that TISCO never needed to worry about customers till nineties, the culture
of customer focus was missing in TISCO. The management took many efforts to
bring in customer orientation among the employees.
They include:
1) Segregation of marketing and the sales functions
v
2) Introduction of performance-based compensation system .
3) Conducting ‘Customer week’ program every year to reiterate the company’s
iv Ibid 2
v Business Today 2001. Tisco Then & Now. February 21, 2001, retrieved from http://archives.digitaltoday.in/
businesstoday/20010221/cf.htmlon 20th Nov 2013
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vi
care for the consumers
With the above mentioned measures, TISCO was able to successfully establish
itself as competitive player once again in Indian Steel Industry by late nineties.
Problem of late nineties – facing downward cycle of steel industry
Steel Industry, like any other commodity industry, is cyclical in nature where the
prices move up and down cyclically over time. The downward cycle period would
always be tough and typically forced steel makers to adjust their product capacity
by shutting down the plants. These closures restore the equilibrium between
demand and supply and would create an upward movement in steel prices.
However, Indian steel makers remained largely insulated from the cyclical
movements of the global steel industry till early nineties thanks to Indian
government's restrictions on steel imports till nineties.
The global steel industry got into a downward cycle in late nineties. But this time
the price crash was more serious than the previous cycles. There was a dramatic
shift in the supply-demand picture following the collapse of the erstwhile Soviet
Union. After the breakup of the Soviet Union, steel consumption in the former
Soviet Union states fell drastically. Consumption in the region fell from 116.6
vii
MTPA in 1990 to 28.8 MTPA in 1998 and recovered to 40.7 MTPA in 2000 .
Steel production too fell, but not so sharply as consumption resulting in huge
surplus steel in those countries. The notional surplus of finished steel (difference
between production and consumption) in the year 2000 in the former USSR
countries was around 45.6.million tonnes. Hence these countries resorted to
exporting their surplus steel products. They sold steel in the international market
cheaply on account of lower production costs flowing from large-scale
devaluation of their currencies and the vastly depreciated plants and machinery,
built during the socialist regime at low costs. This led to collapse of steel prices in
vi Business India 2001. New Steel in an old bottle. Jul 23- Aug 5, 54-60
vii Scope Marketing 2001. Steel Industry-2001
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the international steel market.
Falling demand growth rate
Given the fact that by late nineties Indian steel market was liberalized fully and
hence not protected from global steel cycle, steel prices fell in India also. This
condition was further exacerbated by decline in domestic steel demand due to the
general economic problems (Table 1). There was also another reason for the fall in
demand growth in Indian Steel industry. In the pre 1991 controlled regime, the
steel demand was artificially contained to have it on on par with the supply. And
once the curbs were removed, the demand moved up from the contained level to the
actual levels during 1994-95 and 1995-96 (Table 1). By mid-nineties this
adjustment was complete and the steel growth fell. However, the new steel makers,
who entered the steel market after liberalization, misread the situation. They
considered it as real growth in demand for steel and went in for huge capacity
additions. The excess capacity thus created led to a glut in the domestic steel
market. The demand for hot rolled (HR) products for the fiscal year 2000-01 was
8.5 million tonnes whereas the capacity in the segment was around 12.5 million
tonnes. Similarly in the cold rolled (CR) segment, the
demand was 3.5 million tonnes whereas the capacity stood at 5 million tonnes. The
demand-supply mismatch took its toll in the steel prices. The domestic steel prices
fell drastically in the late nineties along with international prices. In 1998, the
prices of steel products on average have fallen by 40 % compared with price levels
in 1994-95. They recovered slightly in mid 1999. However, the recovery was
mainly restricted to long products and was not significant for flat products in India
owing to the poor performance of end user industries of flat steel like consumer
durables.
Another effect of the demand-supply was the fall in the capacity utilization. Given
the capital-intensive nature of steel industry, capacity utilization is vital for
steelmakers for ensuring good financial performance. However, due to the slump
in demand growth, the capacity utilization of Indian steel makers fell drastically to
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78 % in 1998 from around 100 % in early nineties (Refer annexure).
Many steel makers, both at the Indian level and global level, were not able to
withstand the lower price regime and absorb the hit in their bottom line (Exhibit 1)
and hence closed their plants (Table 2).
Tata Steel realized that the only way to overcome the problem is to cut down cost
and improve productivity. Besides it also decided to focus on high margin products
by altering the product mix.
viii
In 1998-99, TISCO set its vision as below
• 'Tata Steel enters the new millennium with the confidence of a learning
organisation; knowledge-based and happy organisation.
• We will establish ourselves as the supplier of choice by delighting our
customers with our services and our products.
• In the coming decade, we will become the most cost competitive steel plant and
so serve the community and the nation.
• Where Tata Steel ventures ....... others will follow.'
Cost cutting efforts
To overcome the problem, TISCO took many cost cutting initiates in its
production process. The company benchmarked with the best practices of leaders
ix
like Nippon and POSCO for cost cutting efforts . Lot of measures have been taken
in this regard, particularly in the production processes, which ultimately led to a
significant reduction in costs. The effects of cost cutting measures were visible in
x
many fronts. A few major signs were :
• The raw material consumption per ton of saleable steel came down by 31
percent in the period 1991-2003 and stood at 3.3 tons of raw materials per ton of
saleable steel in March 2003.
• Cost of production of HRC came down from $ 218/ton in FY 1990-91to $
viii http://www.tatasteelindia.com/corporate/vision-archives.asp
ix Ibid 5
x Irani Jamshed J, 2003. Business Excellence for Corporate Sustainability. Tata Search
Jayaraman,R, Agarwal R K , & Chatterjee Amit . 2003. The Transformation of Tata Steel, Tata Search
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150/ton in FY 2000-01
• Specific energy consumption came down from 8.7 Gcal/tcs to 7.1 Gcal/tcs in
2003.
• Specific lubrication consumption came down from 1.25 kg/ton in FY 96 to 0.55
kg/ton in FY 02
• Specific Refractory consumption came down from 20.61 Kg/ton in FY 96 to
8.19 kg/ton in FY 02
The management ensured that reduction in manufacturing cost did not affect the
quality of the products. Quality coordination was considered as the backbone of
the steel major, and all 90 departments in the company received the ISO 9000
certification. The core group attached to the Managing Director's office drove the
quality program in TISCO. Besides ISO 9000, the company also adopted ISO
14000, QS 9000 and six sigma.
The cost cutting measures did not stop with the production processes alone. The
company was procuring around INR 20 billion worth of raw materials from
hundreds of vendors across the country. It roped the consultancy firm, Booz-Allen
& Hamilton to help set up a procurement mechanism through efficient vendor-
xi
management, long-term contracts, and other systems . It cut down the manpower
cost further by bringing down the employee strength by 38,000 by 2001.
These efforts paid off and by April 2001, TISCO had emerged as the world's
lowest cost producer of steel. TISCO's operating cost at the 'hot metal' (liquid)
stage was US $75 per tonne while for other steel makers it varied from US $90 to
US $150. The company's cost per tonne of finished steel stood at $152 for the
financial year ending March 2001. The World Steel Dynamics (WSD), renowned
industry analyst firm based in the US, in a report stated, "Tata Steel is a 'world class'
steel maker – the only company in India – and one of the few companies in the
world with such a standing. TISCO was the only steel maker in India which
xi Business Today 1999. Can TISCO Remake Itself Into Tata Steel?” April 7, pp 30-32.
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remained profitable during late nineties and early 2000s (Refer Table 3). The
global steel market turned around in early 2000s as the prices recovered.
In April 2002, the company launched its ‘VISION 2007’ in May 2002, which
focused on becoming an EVA (Economic Value Added) positive company by
2007. The reward system of the company also focused on ‘ability to achieve’ even
in uncertain environment to reach the Vision 2007. This has been indicated
through the ‘ASPIRE’ program. ASPIRE was the acronym for ‘Aspirational
Initiatives to Retain Excellence’. The conceptualization of ASPIRE program
started in the year 2002, immediately after Vision 2007, and the program was
launched formally on May, 2003 to achieve its vision of becoming an EVA positive
company and also sustaining and improving EVA year on year, even during
xii
average steel price scenario . Thus the challenge was to become EVA positive
under normal steel prices and not be dependent on favorable market conditions. In
other words it focused on achieving EVA positive result in uncertain environment,
i.e. overcoming the cyclical nature of steel industry. ‘Aspire’ program created a
well established reward and recognition system to recognize individuals and
groups in different forums for increasing employee morale.
Meanwhile Tata Steel continued its efforts to cut costs and improve efficiencies. As
part of the exercise, it started outsourcing the non-core activities. The company
outsourced its Jamshedpur city municipal service activities to Jamshedpur Utility
xiii
& Services Company (Jusco), its 100 % subsidiary in FY 2003-04. It outsourced
logistical management involving running its warehouses and stockyards to Tata
Ryerson, the 50:50 joint venture
xiv
with Ryerson Tull of the USA in September 2003. Similarly in mid 2005, Tata
Steel outsourced its IT requirements to IBM India and Tata Consultancy
xv
Services . Due to the changes at the organizational level, Tata Steel has changed
xii http://aspire.tatasteel.com/aspConcept.asp
xiii The Financial Express 2003. Tata Steel Payroll Outsourcing Process To Cut Costs By 20%. December 9th .
Retrieved from http://www.financialexpress.com/news/tata-steel-payroll-outsourcing-process-to-cut-costs-by-
20/72397/ on 20th Nov 2013
xiv http://www.tata.com/company/Media/inside.aspx?artid=UwaT8dTLzJU=
xv http://www.tata.com/company/Media/inside.aspx?artid=guAgfKV4ZAw=
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their organization structure many times in since early nineties. Still the
performance of the company was not affected during those years (Table 3).
Problem of early 2000s- Too small to survive
Globally, steel industry was a fragmented industry. The top 10 producers
accounted for just 25 % of the total market share in 2001. This stood in contrast
with other capital-intensive industries, where the concentration was much higher.
For example in automobiles, the top 10 players controlled more than 90 % of global
output in 2001. Intense competition among competitors on the same turf resulted in
mutual destruction. Achieving synergy and economies of scale through
consolidation was the only way to survive in the long term. Hence global steel
industry took the consolidation route in late eighties. It gained momentum in late
nineties and early 2000s. In 2002, Boston Consultancy Group (BCG) published a
study, which indicated that the steel companies need to be big to survive in the long
run. Steel Industry experts estimated that after two decades there would be room
for only 10 to 15 primary steel makers in the global steel market. But in 2002,
TISCO, which was a primary steel maker, did not even figure in the list of top 50
steel makers in terms of crude steel capacity. With 3.5 MPTA capacity TISCO was
ranked 57th in the world in 2001, and for comparison SAIL was ranked at 14th. So
it was clear that the TISCO’s capacity was not enough for the long-term viability,
going by the argument given BCG.
Acquisition Drive
One option was to grow big through greenfield capacity additions. But in Indian
context, due to bureaucratic delays and political hurdles, it would take decades to
match the global giants’ capacity through greenfield capacity additions. Greenfield
capacity additions outside India were not advisable, given the excess steel capacity
in the global steel market. So the only possible route was to grow through
acquisitions. But the opportunities for making acquisitions in India were limited.
xvi
By 2001, in India the steel capacity was around 30 million tons per annum . But
apart from SAIL, all other steel makers were very small in terms of the steel
xvi Annual reports 98-99, 2001-02, Ministry of steel, Govt. of Indi
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making capacity. Hence acquiring them would not significantly increase the
capacity of TISCO. Further acquiring them was also difficult as they were family
owned and the families are generally reluctant to sell their core businesses.
Another option was to acquire SAIL. But the Government of India had no plans for
outright sale of SAIL. Hence TISCO decided to make acquisitions abroad. But 70
percent of international mergers fail due to various reasons. So TISCO decided to
go slow. In 2004 August, TISCO acquired the steel business of Singapore based
NatSteel Ltd for SG $ 486.4 million (Indian INR 13.13 billion) in an all cash deal.
NatSteel was a major player in Singapore and owns steel mills in China, Thailand,
Vietnam, Phillipines and Australia, with a capacity of 2 MPTA. The steel business
xvii
of NatSteel reported a turnover of $1.4 billion and a profit before tax of $47
million . In December 2005, the company acquired a controlling stake in Thailand
based Millennium Steel (with a capacity of 1.7 MPTA) for US $130 million.
Meanwhile Tata Iron & Steel Co Ltd was officially renamed as Tata Steel Ltd in
August 2005.
With these acquisitions and the brownfield expansions at Jamshedpur Tata Steel’s
capacity touched 8.5 MPTA with a consolidated turnover of INR 225.20 billion at
xviii
the end of financial year 2005-06 . Still, it remained at 56th rank among the
global steel producers based on capacity. Based on the experience gained through
the smaller acquisitions abroad, Tata Steel went for the big ticket acquisition of
Anglo Dutch Steel maker Corus in 2006-07.
Acquisition of Corus
Corus could trace its origins to British Steel, which was formed in 1967 by the
merger of 14 steel companies. In the year 1999, British Steelmerged with the Dutch
steel producer Koninklijke Hoogovens to form Corus. In 2006, Corus was the
ninth-largest steel producer in the world with a capacity of 18.3 MTPA of steel
output. It had a turnover of £10.14bn (INR 850 billion) with a pre-tax profits of
£580m. In other words, Corus was five times bigger than Tata Steel at the time of
xviiThe Financial Express 2004. Tata Steel Acquires Singapore’s NatSteel August 17. Retrieved from
http://www.financialexpress.com/news/story/112832on 20th Nov 2013
xviii Tata Steel Annual report 2005-06
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acquisition.
Corus had 47,300 employees worldwide and had factories in UK, Belgium,
Germany, France, Norway and the Netherlands. Its client base includes diverse set
of companies in the aerospace, automotive, building and construction, engineering
and packaging industries. Corus had four main operating divisions: Strip Products,
Long Products, Distribution & Building Systems and Aluminium. Corus’ steel
business (Of the four, what constitutes the steel division) accounted for 91% of
total turnover during this period. In terms of geography, Corus derived about 80%
of its revenue from the EU market in 2006, owing largely to its wide distribution
network in this region.
The process of Corus acquisition started in October 2006, when Tata Steel
announced its bid to take over Corus Group for US$7.6 bn, paying 455 pence per
share. The bid was accepted by the board of Corus. But in November 2006,
xix
Brazilian steel maker Companhia Siderurgica Nacional’s (CSN) joined the fray
and made a counter offer to Corus of 475 pence per share. Tata Steel responded by
raising its offer price to 500 pence per share, which valued the company at $9.6 bn.
CSN persisted and revised its bid to 515 pence per share amounting to US$9.6 bn.
As a result of offers and counter offers from Tata Steel and CSN, the Takeover
Panel, Britain’s watchdog on mergers and acquisitions, initiated an auction process
to decide the winner. On January 31, 2007, Tata bagged Corus with 608 pence per
share in the auction process.
The final valuation of Corus was thus put at $12.04 billion and the final deal
structure was as follows:
• $3.5–$3.8 billion infusion from Tata Steel ($2 billion as its equity contribution,
$1.5–1.8 billion through a bridge loan.
• $5.6 billion through a LBO ($3.05 billion through senior term loan, $2.6 billion
through high yield loan).
xix CSN was Brazil’s 2nd largest steelmaker. It was founded as a state-owned enterprise in 1941 andwas
privatized in 1993
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With the acquisition of Corus, the total steelmaking capacity of Tata Steel jumped
to 27 MTPA, which vaulted it to the #5 spot amongst the largest steel making firms
in the world when the deal became effective in April 2007.
Aside from making Tata Steel as one world’s largest steel makers, thereby giving it
the much needed scale, the acquisition was also expected to provide significant
synergies. Some of the prominent synergies that were expected to arise from the
deal were:
• Tata Steel had a strong retail and distribution network in India and South East
Asia. This would give Corus an in-road into the emerging Asian markets. Tata
steel was a major supplier to the Indian auto industry and the demand for value
added steel products was growing in this market. Hence the combined entity
would benefit from powerful combination of high quality developed and low
cost high growth markets
• There would be technology transfer and cross-fertilization of R&D capabilities
between the two companies that specialized in different areas of the value
xx
chain
• There would be significant cost savings in logistics and by sharing best
practices.
But the stock market reacted negatively to the announcement of the acquisition and
Tata Steel’s shares fell by about 8.1% on the very first day. Some analysts felt that
Tata Steel had overpaid for the deal. The price paid by Tata Steel was 68% higher
than the average of Corus' stock price over the year ending October 4, 2006, when
Tata Steel launched the bid to acquire Corus. Rating agencies also downgraded
Tata Steel shares. Another reason for investors’ and analysts’ scepticism was that
Corus had been less profitable as compared to the highly profitable Tata Steel.
Immediately after the acquisition, Tata Steel initiated integration processes at both
the strategic level and the functional level, by constituting joint integration teams.
The company indicated that the overall philosophy of the integration process was
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“One Enterprise – Two Entities”. A Strategy and Integration Committee, headed by
the Group Chairman, was formed. The committee was tasked to meet on a regular
basis to review progress on the strategy and integration road map and ensure that
key milestones are being met. Teams with defined synergy targets to be achieved
were also created in the areas of manufacturing, procurement, research and
development, IT, finance and capital projects. The first phase was termed 'Wave
One' synergies and the group was targeted to achieve savings worth US$450
million target by the end of Financial Year 2009-10.
Also, a new organization structure was created for Tata Steel group. It included an
umbrella management team that consisted of senior Corus Group and Tata Steel
executives. The team was co-chaired by Tata Steel's Managing Director and Corus
CEO. The other members of the team include directors from various functions of
both the companies. The ‘group centre’ was set up to ensure a common approach
across the key functions - technology, integration, finance, strategy, corporate
xxi
relations, communications and global minerals (Refer Exhibit 2).
To further leverage synergies between Tata Steel and Corus and accelerate
performance improvement through learning and sharing, a Performance
Improvement (PI) Committee was constituted in January 2008. Under this
committee, seven PI groups started functioning, identifying Key Performance
Indicators (KPI’s) to be improved and improvement projects to be undertaken
across various sites of the Tata Steel Group. Each group had Process Improvement
teams from various areas. This Process Improvement Teams (PITs) were required
to ensure application of best practice across the Group to improve the operational
efficiency of the chosen process. The PITs benchmarked their chosen operations,
particularly in Europe, against major competitors and identifying best practices
within the Group that can be transferred to other sites.
xx Vishwanath.S.R,2010 Tata Steel: Financing the Corus Acquisition, Asian Case Research Journal, 14(2), 295–312
xxi www.rediff.com 2007. Tata Steel rejigs senior team to integrate Corus, November 29th, Retrieved from
http://www.rediff.com///money/2007/nov/29corus.htm on 20th Nov 2013
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The first year of integration went according to the plan and, in the financial year
2007-08, Tata Steel and Corus jointly realized synergy benefits of US $76 million,
which amounted to 16 % of total target. Also Tata Steel achieved the Vision 2007
and become an EVA positive company. Hence it outlined its next vision statement
‘Vision 2012’ in March 2008. Vision 2012 envisioned the company to double
returns on investment (ROI) from around 16 %in 2008 to 32 % by 2012. Also, by
2012, the group wanted to be the “global steel industry benchmark for value
xxii
creation and corporate citizenship . Besides doubling of the ROI and value
creation, the vision also envisaged safety and environmental aspects and the Tata
Steel Group’s aspiration to become an “employer of choice.” Vision 2012’ was co-
created by the group’s manpower resources in Jamshedpur, South-East Asia, the
UK and the Netherlands. While commenting on Vision 2012, then Corus CEO
Philippe Varin commented that the plans to "achieve ROI levels of 32% by 2012 is
stiff. But, if it is achieved, it will really be a benchmark in value creation. Currently,
20% of the raw materials for Tata Steel group is produced in-house and the rest
80% is outsourced. We aim to improve this ratio to 50:50 by 2012. With focus on
margins and performance improvement, we expect that the resultant monetary
benefit of this value creation for Corus will amount to nearly $600 million year on
xxiii
year .”
Global Meltdown after the Financial Crisis in 2008
In mid-2008, the global economy went into a recession after the meltdown of the
financial markets. This in turn affected the demand for steel, and the apparent steel
consumption fell sharply in the Western countries. Globally, steel prices nosedived
to $600 a tonne by the end of 2008, which is one half of the peak price of $1,250 per
tonne in January 2008. This severely affected Tata Steel’s Corus operations also.
Table 7 shows the steel demand in the markets where Tata steel had a presence.
Europe was the key market for Tata Steel Group. In 2007-08, Corus accounted for
xxii Hindu Business Line 2008. Tata Steel outlines ‘vision’ 2012 March 4th , retrieved from
http://www.thehindubusinessline.com/2008/03/04/stories/2008030452400200.htm on 20th Nov 2013
xxiii Economic Times 2008. Tata Steel aims 32% RoI by 2012 March 4th , retrieved from
http://articles.economictimes.indiatimes.com/2008-03-04/news/27695682_1_tata-steel-corus-ceo-philippe-varin-
b-muthuraman on 20th Nov 2013
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76 % of the total revenue of Tata Steel Group. Hence the decline in demand in the
major markets of Corus affected the overall performance of Tata Steel Group. In
2011-12, the revenue share of Corus (renamed as Tata Steel Europe- TSE) stood at
62 % of the total revenue.
The steel demand in south East Asian market was also impacted by the financial
meltdown to certain extent. But it recovered quickly after 2010. This fall in
demand reflected the steel production and shipment of all the Tata Steel Group
companies (Table 9a & 9b). Apart from the falling demand and hence the lower
prices, the company had other issues as well, which are explained below.
Dependence on Raw Material imports
The Indian operations of Tata Steel had 100% self-sufficiency in iron ore and 60 %
for coking coal. The overall raw material self-sufficiency for Tata Steel India was
80 %. But post Corus acquisition, the overall raw material self-sufficiency for Tata
Steel dropped precipitously to 22 %. This was mainly because Corus did not have
captive iron ore and coal resources and depended almost entirely on outside supply
of raw materials. It imported iron ore from Australia, Canada, South Africa, and
South America, and coal from Australia, Canada, and the US. This dependency
made the European business vulnerable to the fluctuations in the iron ore and coal
prices.
Productivity and Efficiency Issues at Corus
The Corus operations were not as efficient as Tata Steel India. In 2005, Corus’
income from operations was just about $108 per ton of steel produced. This pales in
comparison to Tata Steel’s operating income, which was about $280 per ton of steel
in the same year. Analysts predicted that the operating income of the combined
xxiv
entity would be around $146 per ton of steel . The problem with Corus was that it
was a product of numerous mergers and acquisitions over the years - first by
merging 14 British steel firms and then with Hoogovens of Netherlands. The
xxiv Frontline 2006. Burden of steel, Nov. 04-17, retrieved from http://www.frontline.in/static/html/fl2322/
stories/20061117002703500.htm on 20th Nov 2013
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operations were not integrated properly, post merger. “They (the Dutch and British
units) practically functioned as two companies and even competed for the same
orders until recently” said Uday Chaturvedi, a Tata Steel veteran in a media
xxv
interview . Another media report also indicated quoting a former Tata Steel
executive who said "When we acquired the company, the fight between the British
xxvi
and Dutch sides was at its peak. We inherited a legacy . " There were also other
issues like bloated and bureaucratic organizational structure, lack of integrated and
robust supply chain, legacy pension schemes etc.
The poor efficiency also resulted in further erosion of market share in its main
market UK. "While the going was good, Corus dominated the UK market as it was
the only home-based company. In a way, Corus was in a cocooned environment.
But once the market collapsed, the Europeans entered Corus's domain," said Malay
Mukherjee, who has handled several acquisitions as a board member of Arcelor-
xxvii
Mittal till 2008 .
The production units in Europe also had history of safety related issues and
industrial accidents some which were fatal. The accidents continued even after the
takeover the Tata Steel. There was one fatal accident in April 2008, a third-party
fatality to a customer’s employee in April 2009. Few more fatal accidents occurred
in April 2010, August 2010, and April 2011. The company was required pay hefty
fines to the victims for such accidents.
Integration of Corus with Tata Steel India
The media reports indicated that Tata Steel faced problems in integrating Corus
operations with Indian operations due to cultural issues. The European
manufacturing culture was vastly different from Indian manufacturing culture and
this proved to be a stumbling block. The recommendations given by the Indian
xxv Forbes India 2013. Putting the Shine Back Into Tata Steel, April retrieved from http://forbesindia.com/
article/boardroom/putting-the-shine-back-into-tata-steel/35049/1on 20th Nov 2013
xxvi Business Standard 2013. What the Tata Steel write-off reveals retrieved May 21, Retrieved from
http://www.business-standard.com/article/companies/what-the-tata-steel-write-off-reveals-113052101267_1.html
on 20th Nov 2013
xxvii ibid
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advisors were not taken seriously by the European Executives, according to media
xxviii
reports . The situation was further complicated by frequent management
changes at the top at Corus. The company had three CEOs in short span of two
years between 2010 and 12.
High Debts
As indicated earlier, Tata Steel financed its Corus acquisition mainly through
debts, as it is a leveraged buyout. The poor operational / financial performance of
Corus during this period put additional pressure on Tata Steel's debt position. The
net debt of Tata Steel group stood atINR 613 billion (US $ 10.2 billion) at the end
xxix
of June 30, 2013 .
All the above mentioned had affected the financial performance of Tata Steel
Group during 2009-13 period (Table 4).
Efforts from Tata Steel to overcome the problem
The top management of Tata Steel was aware of the problem and started taking
efforts to overcome them. Those measures are explained below.
Streamlining of European Operations
To streamline the operations of Corus, Tata Steel took two major initiatives in
2008-09, namely “Weathering the Storm” and “Fit for the Future” programs.
Weathering the Storm was aimed at offsetting the impact of reduced steel demand
in Europe. It involved several short-term actions designed to cut costs and keep
supply-demand in balance. As a part of this initiative, the production was cut by at
least 40 % through temporary idling of the blast furnaces. Additionally, the
company eliminated overtime, altered shift patterns to reduce shift bonus
payments and implemented work agreements that allowed the company to reduce
xxviii Ibid 24
xxix The Telegraph 2011. Tata Steel charts three-point strategy to tackle debt, January 3rd Retrieved from
http://www.telegraphindia.com/1110103/jsp/business/story_13384470.jspon 20th Nov 2013
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the hours of employees who were experiencing shortages of work. There was also a
reduction in the use of third-party services. These measures provided notable relief
in the very first year as the firm reported an estimated net savings of over £700
million in the second half 2008-09.
The main items in the ‘Fit for Future’ initiative included divestment, asset
restructuring and an efficiency & overhead review. The initiative resulted around
3,700 job cuts as on June 2013 out of the Corus’ 42,000 (as on June 2008)-strong
workforce. In November 2008, Corus sold its 50% stake held in GrantRail, which
was providing rail infrastructure services, to VolkerWessels, its joint venture
partner for an unknown sum. The company sold its two aluminum smelters in
Netherlands and Germany to Klesch & Co in February 2009, for an unknown sum.
In February 2011, the company sold its Teesside Cast Products unit in northeast
England, to Thailand’s Sahaviriya Steel Industries Pcl (SSI) for $469 million.
Further, as part of this initiate, the company wrote down assets worth INR 40.95
billion (US$ 805 million) for the financial year 2008-09.
These measures were expected to produce steady-state benefits of more than £250
million (US $ 400 million) per annum at Corus. In September 2010 Corus was
rebranded as Tata Steel Europe, to have a common identity.
The company went for restructuring in its other arms also. In July 2010, the
company’s Singapore-based subsidiary NatSteel Holdings sold its 27 % stake in
Malaysian firm Southern Steel Berhad for US $72 million.
Quick completion of expansion plans in India
Tata Steel faced strong headwinds in the European Steel market but that was partly
offset by a steady demand for steel products in the Indian market. (Refer Table)
Given that Tata Steel India was one of the low cost steel producers, it had a good
opportunity to benefit from the growing Indian market by increasing its capacity. It
completed the 2.9 MT Brownfield expansions on Jamshedpur during the financial
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year 2013-14 there by taking the total capacity in Jamshedpur facility to 9.7 MT
finished steel. The company was working on a 6 MTPA Greenfield Integrated
Steel Plant at Kalinganagar, Odisha, which would make hot and cold rolled flat
products and would be built in two phases, each of 3 MTPA. They were expected to
be commissioned in 2014-15 and 2015-16 respectively.
Investment in raw material assets to provide better raw material security
The Global Mineral resources division of Tata Steel increased its efforts to secure
raw material supply for the European Operations. As of October 2013, it was
working on two major initiatives in this regard, one for coal and the other one for
iron ore.
In Mozambique’s Moatize basin, Tata Steel partnered with global mining giant Rio
Tinto in the Benga project. Tata steel had 35% equity stake and was entitled to 40%
off-take of coking coal produced in the project. The project started producing coal
and made its first shipment in June 2012 and capacity would be ramped up in
phases.
Tata Steel, through its subsidiary Tata Steel Minerals Canada Limited (TSMC),
was involved in the development of Direct Shipping Ore (DSO) project in Canada.
The Company had 80% equity stake in TSMC with the balance 20% equity stake
held by New Millennium Iron Corporation (NML), a Canadian mining company.
Direct Shipping Ore project successfully completed trial production in 2012 and is
targeting to produce 1 MT of iron ore in Financial Year 2013-14. The production
would be ramped up to about 6 MTPA In March 2013, Tata Steel entered into a
framework arrangement through TSMC with Labrador Iron Mines (LIM) for the
acquisition of a 51% stake in LIM’s Howse deposit to exploit significant synergies
that exist between the two mine deposits.
Raw material from these would be mainly used to partially integrate the
Company’s European operations.
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Vigorous pursuit of continuous improvement across all operations
Tata Steel started focusing on continuous improvement of its operations and
supply chain systems across all its subsidiaries and Corus was targeted heavily as
its inefficiencies were estimated to be very high.
As noted earlier, one of the main reasons for the poor efficiency was the lack of
cooperation among various European Units of Corus and a poorly designed supply
chain system. In November 2010, Corus, by then rechristened as Tata Steel Europe
(TSE), introduced a new organizational model to bring in ‘One company’ mindset
and ‘Customer First’ outlook among employees. This was basically aimed at
unifying sales and marketing function and to drive the activities of a single supply
chain function which would be fed by three operational hubs. The three hubs were
Strip Products Mainland Europe based at IJmuiden, Strip Products UK based at
Port Talbot, and Long Products Europe based at Scunthorpe. They included the
Company’s production, engineering and technical operations. The creation of the
supply chain and sales and marketing functions was expected to allow the
management of the three hubs to focus exclusively on improving production
stability, efficiency and costs. Also, the new operating model comprised of
integrated support functions including finance, procurement and
xxx
communications .
The 'Kar Vijay Har Shikhar' (KVHS) initiative was launched in marketing and
sales at the Indian operations in October 2010, to enable a proactive and
differentiated approach towards market creation and thus develop a market to
support Tata Steel's volume expansion in India to 16 million MTPA.
Subsequently in 2011, as part of developing and deploying an integrated strategy
process across the company, Tata Steel introduced OGSM (Objective, Goal,
Strategy, Measure) process throughout its European operations. This was done to
ensure that actions undertaken in the coming years are in sync with the long-term
goals of the company. The OGSM process aimed step by step improvement in
three key areas: corporate citizenship (health, safety and environment), value
xxx Tata Steel Annual Report 2010-11
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creation and enablers (business excellence and people engagement). OGSM was
expected significantly reduce the competitive gap in the areas like EBITDA&
cash, health & safety, environmental asset compliance, business excellence and
xxxi
customer service & satisfaction over a period time (Refer Exhibit 3).
At NatSteel, the group launched Total Operational Performance (TOP) initiatives
to improve the efficiency of the upstream operations and productivity
enhancement drives to improve the efficiency of its downstream operations. In
Financial Year 2011-12, NatSteel's operations in Vietnam underwent a complete
xxxii
modernization, doubling its rated capacity to over 2 million MTPA .
During the Financial Year 2011-12, Tata Steel Thailand (TSTH) launched the
'Turnaround plan' in Thailand, which included most of the company's
improvement projects. These improvement projects covered the areas of product
portfolio optimization, new product development, operations cost reduction and
xxxiii
procurement cost savings .
In South East Asia, the group had taken initiatives to coordinate business activities
between Nat Steel and Tata Steel Thailand to gain synergies. As part of it, a joint
endeavor was undertaken between the two subsidiaries to share best practices, in
areas of safety, sales and marketing, procurement and rolling operations.
Problems Continue
Despite all the efforts, the problems of Tata Steel Group continued. The group had
made net losses in the financial year 2012-13. Tata Steel Europe alone made a
cumulative loss of about INR 100 billion during the five year period (2008-13). In
May 2013, Tata Steel announced that it is writing off goodwill and assets worth US
$1.6 billion (INR. 83.56 billion) for the financial year 2012-13, primarily due to
the weaker macroeconomic and market environment in Europe.
xxxi Tata Steel Annual Report 2011-12
xxxii Tata Steel Annual Report 2011-12
xxiii Tata Steel Annual Report 2011-12
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“In our key overseas markets of Europe and UK, where the Company has
significant manufacturing presence, the economic downturn has significantly
affected steel demand, which is now almost 30% lower than the pre-2008 financial
crisis level. The outlook for the euro zone area currently continues to be depressed”
admitted the Chairman Mr. Cyrus Mistry in Tata Steel’s annual report 2012-13.
Steel industry lobby group Eurofer had also pointed out that European Union has
capacity to make about 210 million tons of steel a year, while demand in a “normal
xxxiv
market” is 150 million to 160 million tons . This clearly indicated the huge
demand-supply mismatch in the forthcoming years and hence lower prices and
lower capacity utilization.
These problems continued to reflect in the performance of Tata Steel Group. The
group’s Europe sales declined by 3.8% sequentially during the first quarter of
2013-14 due to lower sales volumes, even though profitability improved slightly.
Such continued losses are expected to affect the capital structure of the company
also. In July 2013 a report by Bank of America Merrill Lynch projected Tata Steel’s
net debt at INR.632 billion in fiscal 2014, and forecasted the net gearing, or debt to
equity ratio, to rise to 1.75 compared with 1.6 in fiscal 2013.
Tata Steel- an adaptive organization
Between 1991 and 2007, Tata Steel faced three major problems, which threatened
the very existence of the company. However, the company was able to overcome
all of them. Fast forward to 2013, the company was in the midst of another serious
crisis, which according to analysts was largely due to external factors, unlike the
past. The company indicated that it was expecting the outlook of its European
xxxv
operations to turn positive by the financial year 015-16 .. Analysts remained
sceptical about this timeline, indicating that the efforts taken by the company
might not be enough to solve the problem.
xxxiv Mint 2013. Cyrus Mistry forecasts challenging two years for Tata Steel, July 17th , retrieved from
http://www.livemint.com/Companies/VbnXJWzoJ5rlRYryCUoLAL/Cyrus-Mistry-forecasts-challenging-two-
years-for-Tata-Steel.htmlon 20th Nov 2013
xxxv The Financial Express 2013. Tata Steel to restructure European ops, August 15th retrieved from
http://www.financialexpress.com/news/tata-steel-to-restructure-european-ops/1155563on 20th Nov 2013
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ANNEXURE
Table.1 Real Consumption of Total Finished Steel (million tonnes)
Real
Year on Year
Financial Consumption
growth
Year in Million
rate in %
Tonnes
1991-92 14.836
1992-93 15.811 6.6
1993-94 16.114 2.0
1994-95 19.550 21.3
1995-96 22.370 14.4
1996-97 23.294 4.1
1997-98 23.808 2.2
1998-99 24.710 3.8
1999-00 26.348 6.6
2000-01 27.649 4.9
2001-02 28.523 3.2
2002-03 30.677 7.6
2003-04 33.119 8.0
2004-05 36377 9.8
2005-06 41.433 13.9
2006-07 46.783 12.9
2007-08 52.125 11.4
2008-09 52.35 1 0.4
2009-10 59.339 13.3
2010-11 66.423 11.9
2011-12 70.915 6.8
2012-13 73.255 3.3
(Source: Ministry of Steel, Govt. Of India)
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Exhibit 1 Net Profit Margin (NPM) of Indian steel companies (Period 1991-2000)
8
6
4
0
NPM in %
-2 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998- 99 1999-00
-4
-6
-8
-10
-12
Financial year Net Profit..
(Source: CMIE Databases)
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Table 2 Closures in Indian steel sector
Si. Segment Commissioned Closed Units Working units
No Units
No. Capacity No. Capacity No. Capacity
1 Electric arc furnace 188 12,456,860 150 5,758,860 38 669,800
2 Hot rolled units 1,246 24,225,838 469 8,872,209 777 15,353,629
(long products)
3 Hot rolling mills 12 6,302,500 5 262,500 7 6,040,000
(Flat products)
4 Steel-wire drawing units 92 1,205,205 49 619,467 43 585,738
5 Cold rolling mills 85 4,378,521 21 446,580 64 3,931,941
6 GP/GC and polymer 21 2,173,250 3 84,500 18 2,088,750
coated sheets/strip
7 Tin plate units 3 151,638 1 60,000 2 97,638
(Source: Ministry of Steel, Govt. Of India)
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Table 3: Tata Steel (Standalone) Financials
Total Profit PAT PAT PAT PAT Debt to
Financial income after as % as % as % as % of equity
Year INR. tax INR. of total of net of total capital ratio
Billion Billion income worth assets employed (times)
1990-91 23.35 1.60 6.86 11.62 4.9 6.42 0.84
1991-92 28.95 2.01 6.93 13.51 4.84 6.44 1.34
1992-93 34.87 1.19 3.42 6.76 2.16 2.75 1.55
1993-94 38.67 1.81 4.68 8.09 2.67 3.3 1.38
1994-95 46.89 2.64 5.63 10.2 3.5 4.33 1.33
1995-96 60.43 5.66 9.36 18.05 6.72 8.26 1.07
1996-97 69.09 4.69 6.79 12.91 5.01 6.18 1.1
1997-98 70.40 3.22 4.57 8.63 3.21 3.99 1.22
1998-99 57.64 2.82 4.90 7.65 2.64 3.34 1.37
1999-00 63.80 4.23 6.62 11.75 3.78 4.9 1.42
2000-01 72.07 5.53 7.68 14.94 4.78 6.39 1.26
2001-02 77.49 2.05 2.64 5.63 1.73 2.44 1.37
2002-03 99.56 10.12 10.17 30.53 7.99 13.01 1.33
2003-04 122.39 17.46 14.27 46.29 12.83 23.05 0.78
2004-05 162.04 34.74 21.44 62.01 22.89 40.1 0.4
2005-06 174.96 35.06 20.04 42.9 19.72 32.46 0.26
2006-07 203.44 42.22 20.75 36.09 16.57 23.75 0.69
2007-08 231.65 46.87 20.23 26.36 10.78 13.64 1.08
2008-09 274.95 52.02 18.92 22.48 8.39 10.18 1.32
2009-10 280.46 50.47 17.99 16.4 7.03 8.47 0.68
2010-11 333.38 68.61 20.58 16.07 8.31 9.88 0.58
2011-12 385.03 65.23 16.94 12.62 6.94 8.27 0.48
2012-03 428.89 50.63 13.12 9.0 NA 11.9 0.44
(Source : CMIE Prowess Database & Tata Steel Annual Report 2012-13)
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Table 4: Tata Steel Consolidated Financials
Total Profit PAT PAT PAT PAT Debt to
Financial income after as % as % as % as % of equity
Year INR. tax INR. of total of net of total capital ratio
Billion Billion income worth assets employed (times)
2001-02 85.61 1.94 2.26 7.70 NA 6.30 1.97
2002-03 104.91 10.22 9.74 34.98 7.77 13.49 1.30
2003-04 126.03 17.79 14.11 45.24 12.66 22.69 0.77
2004-05 177.43 35.71 20.13 60.73 21.78 38.45 0.46
2005-06 226.21 37.21 16.45 42.86 18.76 30.94 0.33
2006-07 281.61 41.66 14.79 33.09 11.59 15.58 1.66
2007-08 1476.29 123.22 8.35 55.47 13.99 19.19 2.01
2008-09 1514.57 48.49 3.2 18.49 3.86 5.48 2.84
2009-10 1064.05 -21.21 -1.99 -9.07 -1.78 -2.57 2.24
2010-11 1250.72 88.52 7.08 28.70 7.02 10.09 1.60
2011-12 1409.61 47.75 3.39 11.32 3.30 4.66 1.29
2012-13 1388.49 -73.62 NM NA NA NA 1.36
(Source : CMIE Prowess Database & Tata Steel Annual Report 2012-13)
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