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1.0.1 Introduction of Tata Steel:
The growth of an organization is invariably determined not just by its strategy, but on how quickly it responds to the challenges it may encounters. Over the decades, Tata Steel has successfully countered several challenges that have come its way with innovative responses and continuous improvement that have enabled it to remain stable and even convert some of these challenges into opportunities.
It is this culture of survival that has accorded Tata Steel the insight and focus to deal with the current economic environment. Drawing from its inner strength and attitude, Tata Steel responded by launching several initiatives across all its operations in various geographies that are helping the Group to achieve sustainable competitive edge even in the current times. It is also this very culture that will propel Tata Steel to continue on its growth in the coming years.
Tata Steel, formerly known as TISCO and Tata Iron and Steel Company Limited, is the world’s sixth largest steel company, with an annual crude steel capacity of 31 million tonnes. Ranked 258th on Fortune Global 500, it is based in Jamshedpur, Jharkhand, India. According to an annual survey conducted by Brand Finance and The Economic Times in 2010, Tata steel is in the 8th most valuable brand. Tata Steel is also India’s second largest private sector steel company in India in term of domestic production and second most profitable company with consolidated revenues of Rs 1,32,110 crore and net profit of over Rs 12,350 crore during the year ended March 31, 2008.
Its main plant is located in Jamshedpur, Jharkhand. The Jamshedpur plant contains the DCS supplied by Honeywell and the registered office of Tata Steel is in Mumbai. World Steel Dynamics also recognized the company as the world’s best steel producer in 2005.
Since then, Tata Steel has not limited its operations and businesses within India but has built an imposing presence around the globe as well. The Tata Steel Group believed that mutual benefit of countries, corporations and communities is the most effective route to growth. With the acquisition of Corus in 2007 leading to commencement of Tata Steel’s European operations, the Company today is the tenth largest steel producer in the world with employee strength of above 81,000 across five continents.
During the financial year 2009-10, the Group recorded deliveries of 24 million tonnes against 28 million tonnes in the previous year, the decline being a reflection of the global economic slowdown mainly in the UK and European operations. The Group recorded a turnover of Rs.102, 393 Crores in 2009 – 2010. The Company has always had significant impact on the economic development in India and now seeks to strengthen its position of pre-eminence in international domain by continuing to lead by example of responsibility and trust.
Then again, Tata Steel’s overseas ventures and investments in global companies have helped the Company create a manufacturing and marketing network in Europe, South East Asia and the Pacific-rim countries. The Group’s South East Asian operations comprise of Tata Steel Thailand, in which it has 67.1% equity and Nat Steel Holdings, which is one of the largest steel producers in the Asia Pacific with presence across seven countries.
1.0.2 Global steel industry:
The biggest boom in history of steel industry is that of the 1950s and 1960s, when the post-War boom in the developed world drove the steel industry. Now, the current boom is being led by the growth in the developing country such as China, India and Brazil. However, china has now become the engine that has driven steel consumption in the Asian region.
The demand expectations for steel products are rapidly growing for coming years. The shares of steel industries are also in a high pace. The steel industry is enjoying its 6th consecutive years of growth in supply and demand. Then, there is more merger and acquisitions which overall maintained the industry and showed some good results.
The subprime crisis has lead to the recession in economy of different countries, which may lead to have a negative effect on whole steel industry in forthcoming years. However, the steel production and consumption will be supported by continuous economic growth.
The crude steel production for 66 countries reporting to the World Steel Association was 1220 million metric tonnes for calendar year 2009, lower by 8% against that of 2008. Hit by the economic downturn, the drop in production was nearly in all steel producing countries barring positive growth recorded in China, India and the Middle East. In most countries including the developed steel markets of the EU, the U.S.A., Japan, Brazil, CIS deterioration in the economy resulted in a sharp decline of demand in key steel using sectors. Look at table appendix 1.0.1, page showing the top ten steel producing nations.
As a result of the strong growth in China in sharp contrast to the decline in major parts of the globe, Chinese companies are dominance at the list of the top ten steel producing companies during the year 2009. Look at table appendix 1.0.2, page showing the Chinese companies dominating the steel production.
1.0.3 India steel industry:
India has traditionally been one of the major producers of steel in the world. Till the 1990s the steel industry of India was regulated and controlled by government policies. Since its independence, India has experienced steadily growth in the steel industry; the governments have supported the industry and pushed its robust development. Further illustrating this plan is the fact that a number of steel plants were established in India, with technological assistance and investments by foreign countries.
In 1991, the Indian government introduced a substantial number of economic reforms. One of the economic reforms allowed no licenses to be required for capacity creation, except for some geographical areas. These reforms boosted the development process of a number of steel industries in India.
Yet another reform for India’s steel industry came in 1992, when every type of control over the pricing and distribution system was removed, making the modern Indian Steel Industry extremely efficient, as well as competitive. Additionally, a number of other government measures have stimulated the growth of the steel industry, coming in the form of an unrestricted external trade, low import duties and an easy tax structure.
Over the years, India continually posts phenomenal growth records in steel production. In 1992, India produced 14.33 million tons of finished carbon steels and 1.59 million tons of pig iron. The total consumption of finished steel was 14.84 million tones in the year 1992.
The country’s production of crude steel in 2005-06 stood at 42.1 million tonnes, reflecting an increase of 7.1 per cent over the previous fiscal. On the other hand, the consumption of steel during the year was pegged at 41.43 million tonnes, a massive growth of 13.88 per cent when compared with the 2004-05 figures.
In 2008, India produced nearly 46.575 million tons of finished steels and 4.393 million tons of pig iron. Look at graph appendix 1.0.3, page showing the evidence of Indian steel production. Both primary and secondary producers contributed their share to this phenomenal development, while these increases have pushed up the demand for finished steel at a very stable rate. The total amount of domestic steel consumption was 43.925 million tones in the year 2008. With the increased demand in the national market, a huge part of the international market is also served by this industry.
Powered by an increased demand for steel from neighbouring China, which has been clocking a 15 per cent sectorial growth annually on account of construction projects in preparation for the Olympics. The steel industry in India is also being competitive over the past two years and has grown about 10 per cent compared with the global growth rate of about 6 per cent a year.
Eventually, India has set it vision to become an economically developed nation by 2020. The steel industry in India has a very high growth potential and is expected to play a major role in India’s economic development in the coming decades. On top, India is also projected to emerge as a strong force in the global steel market in the future.
2.0 Conducting strategic Position Analysis:
2.0.1: Application of Position Analysis to TATA Steel (1): Porter 5 forces model
Backed by robust volumes as well as realizations, steel Industry has registered a phenomenal growth across the world over the past few years. The situation in the domestic industry was no exception. In fact, it enjoyed a double-digit growth rate backed by a robust growing economy. However, the current financial crisis seems to have created medium term hiccups. Using Michael Porter’s five-force model, I will analyzed the domestic steel sectors to understand the competitiveness of the sector as well as pointed out the initiatives taken by Tata Steel to safeguard its position from all the five forces of threats, namely:
Threats of new entrants.
Intensity of rivalry among existing competitors.
The bargaining power of suppliers.
The threat of substitute products.
The bargaining power of buyers.
> Entry barriers: High
In term of Capital Requirement: Tata Steel had made sufficient efforts to safeguard itself in this regard. Its has a lineup of Greenfield projects which it plans to establish not only in domestic markets (Jharkhand, Orissa & Chhattisgarh but also internationally (Bangladesh, Iran & Vietnam). Besides that, it has already completed its expansion capacity of its existing plant from 5 mtpa to 6.8 mtpa at Jamshedpur with an investment of Rs 5,000 crore, while it is in the process of expanding the capacity from 6.8 mtpa to 10 mtpa with an estimated investment of Rs 15,000 crore. The company has invested Rs 8,000 crore out it and it expects to achieve 10-mtpa capacities by 2011-12. It would prove to be very difficult for any new entrant to come up with such huge investment outlays.
In term of Economies of scale: Tata Steel being an integrated steel company has its own mines for key raw materials such as iron ore and coal that protects them from potential threat of new entrants to a significant extent. Tata Steel owns raw material assets such as coal and limestone mines through joint ventures or completely, with the assets spread across countries such as Australia, Oman and Mozambique.
In term of Government Policy: Tata Steel being a century old company under the flagship Tata Sons that is known for its Corporate Social Responsibility Look at table appendix 1.0.2, page regarding their Corporate Governance already enjoys a respectable position in front of the Indian Government. The Jharkhand government on May 24th 2009 has granted a prospecting licence (PL) to Tata Steel for the Ankua iron ore mines. A senior company official said that Tata Steel has been allocated 1,800 hectares for prospecting in the Ankua area. Another 10,000 acres of land will be allocated to them for their project in Ranchi.
In term of Product differentiation: Tata Steel still enjoys a premium for their products because of its quality and its brand value created more than 100 years back. Tata Steel has introduced brands like Tata Steelium (the world’s first branded Cold Rolled Steel), Tata Shaktee (Galvanized Corrugated Sheets), Tata Tiscon (re-bars), Tata Bearings, Tata Agrico (hand tools and implements), Tata Wiron (galvanized wire products), Tata Pipes (pipes for construction) and Tata Structura (contemporary construction material). Apart from these product brands, the company also has in its folds a service brand called “steel junction”.
> Competition: High
The steel industry is truly global in terms of competition with large producing countries like China significantly influencing global prices through aggressive exports. The 4 major domestic rivals are SAIL, JSW, ISPAT and ESSAR STEEL, which the rests are all smallish mills which together accounts for 30 % of the total market share.
Currently, two Global Steel majors namely Arcelor- Mittal, which is the world’s largest I and POSCO, are posed to be the biggest threat as they plan to enter the Indian Steel Industry very soon. Look at table appendix 1.0.2, page analysis on Tata Steel Competitor.
Bargaining power of suppliers: Low
The bargaining power of suppliers is low for fully integrated steel plants as they have their own mines of key raw material like iron ore coal for example Tata Steel. However, those who are non-integrated or semi integrated has to depend on their suppliers for example SAIL, which imports coking coal.
Globally, the Top three mining giants BHP Billiton, CVRD and Rio Tinto supply nearly two-thirds of the processed iron ore to steel mills and command very high bargaining power. In India too, NMDC is a major supplier to standalone and non-integrated steel mills.
Since domestic raw material sources are insufficient to supply the Indian steel industry, a considerable amount of raw materials has to be imported. For example, India’s hard coal deposits have sufficient amount, low quality plus the prices of coking and non-coking coal are ever increasing. For this reason, hard coal imports have increased in the last five years by a total of 40% to nearly 30 million tons. Almost half of this is coking coal. The rising output of electric steel is also leading to a sharp increase in demand for steel scrap. Some 3.5 million tons of scrap have already been imported in 2006, compared with just 1 million tons in 2000.
In order to safeguard itself from the high bargaining power of the buyers, Tata Steel has forayed much earlier into the strategy of ‘Backward Integration’. Look at appendix 1.0.3, for more detail regarding this.
Threat of substitutes: High
Plastics and composites pose a threat to Indian steel in one of its biggest markets – automotive manufacture. For the automobile industry, the other material at present with the potential to upstage steel is aluminum. Perhaps the most attractive alternative to stainless is aluminum. Stainless producers themselves are offering their customers a range of alternatives in an effort to prevent business being lost to non-ferrous or carbon steel materials. Such options include lower-nickel duplex grades and ferritic types. In the meantime, nickel’s fluctuations will continue to create problems for the stainless industry worldwide.
At the present, Steel has already been replaced in some large volume applications: railway sleepers (RCC sleepers), large diameter water pipes (RCC pipes), small diameter pipes (PVC pipes), and domestic water tanks (PVC tanks). The substitution is more prevalent in the manufacture of automobiles and consumer durables.
Bargaining power of Buyers: Mixed
Some of the major steel consumption sectors like automobiles, oil & gas, shipping, consumer durables and power generation enjoy high bargaining power and get favorable deals. However, small and retail consumers who are scattered and consume a significant part do not enjoy these benefits.
2.0.2: Application of Position Analysis to TATA Steel (2): S.W.O.T Analysis
S.W.O.T analysis is done for an organization, to uncover its overall Strengths, Weaknesses, Threats and Opportunities leading to measuring their competitive edge. The SWOT Analysis enables an organization to adopt strategies accordingly and recognize its market standing.
Using this analysis, I will analyze their weakness and threats that Tata Steel is currently facing. First, I will examine internally what weaknesses that Tata Steel is facing then after that I will examine externally what are their Threats. Regarding their Strength and Opportunities please look at table appendix 1.0.2, page analysis on Tata Steel Competitor.
1. Steel production in India is also hampered by power shortages.
2 Insufficient freight capacity and transport infrastructure impediments to hamper the growth of Indian steel industry.
3. Raw materials for steel production are rapidly depleting and are nonrenewable; organization has to come up with sustainable methods in steel production.
4. India is deficient in raw materials required by the steel industry. Iron ore deposits are finite and there are problems in mining sufficient amounts of it.
5. Low Labour Productivity:
In India, the advantages of cheap labour get offset by low labour productivity; e.g., at comparable capacities labour productivity of SAIL and TISCO are 75 t/manyear and 100 t/manyear, for POSCO, Korea and NIPPON, Japan the values are 1345 t/man year and 980 t/manyear.
6. High Cost of Basic Inputs and Services:
High administered price of essential inputs like electricity puts Indian steel industry at a disadvantage; about 45% of the input costs can be attributed to the administered costs of coal, fuel and electricity, e.g. cost of electricity is 3 cents in the USA as compared to 10 cents in India; and freight cost from Jamshedpur to Mumbai is $50/tonne compared to only $34 from Rotterdam to Mumbai.
7. Endemic Deficiencies:
These are inherent in the quality and availability of some of the essential raw materials available in India, e.g. high ash content of indigenous coking coal adversely affecting the productive efficiency of iron making and is generally imported. Advantages of high Fe content of indigenous ore are often neutralized by high basicity index. Besides, certain key ingredients of steel making, e.g. nickel, Ferro-molybdenum is also unavailable indigenously.
1. Threat of Substitutes: Plastics and Composites.
2. High raw material input cost and scarcity of nonrenewable raw materials are a threat to the industry. (e.g. Coal, limestone etc.).
3. In the developed world, industries have been facing rising environmental costs due to the increased concerns on Global Warming. It is, therefore, a challenge and responsibility for the Steel industry to be the trustee in conservation of nature for future generations.
4. It is recognized that the steel and aluminum industries are significant contributors to man-made greenhouse gas emissions as the manufacture of steel produces carbon dioxide (CO2), and the manufacture of primary aluminum generates both CO2 and per fluorocarbons (PFCs).
2.0.3: Application of Position Analysis to TATA Steel (3): P.E.S.T.E.L Analysis
In the last 12 months, the financial market has been volatile triggered by the subprime mortgage crisis in the US. This has adversely affected the liquidity and the risk perception of the international capital markets. Inflation has increased around the World boosted by mainly increase in food and energy prices. The real effective exchange rate for the US dollar has declined since mid-2007 as foreign investment in US bonds and equities has been dampened by reduced confidence in both the liquidity and the returns on such assets, weakening of US growth prospects and interest rate cuts. The main counterpart to the decline of the dollar has been appreciation of the euro, the yen, and other floating currencies such as the Canadian dollar and some emerging economy currencies.
The acquisition of Corus is being financed by a substantial amount of debt. This puts pressure on Tata Steel and should the business environment deteriorate, the necessity to service this debt could restrain Tata Steel in its future investment and capacity expansion plans.
Due To Subprime Crisis in USA a subsequent tremor all along the world, especially in developed market in Western Europe make the vulnerable position of Corus even more risky. UK, Germany and Netherlands the main market for Corus products are facing the fear for recession on negative growth.
The steel industry is highly cyclical, receptive to general economic conditions and reliant on the condition of a number of other industries, including the automotive, appliance, construction and energy industries. If these industries experience a downturn, Tata Steel too would too take a hit, thus negatively impacting it’s rating.
Corus follows the policy of entering into long term supply contracts with raw materials vendors. Thus there can be a huge time gap between variation in prices under purchase contracts and the time when Corus can make a corresponding price change under its sales contacts with its consumers. Moreover, Corus may not be able to pass on the increased raw materials costs to its customers. Such developments would lead to a downside in our rating.
Steel production processes are energy dependent and price movements in the energy market would accordingly affect Tata Steel’s bottom line.
Tata Steel became 6th biggest Steel Producer in the World after acquiring Corus, but the cost of the integration goes much more beyond the financial aspect. There are other factors that will add to overall integration costs such as:
Cross Cultural Integration.
Tata committed a huge amount of investment in politically unstable country like Bangladesh, Iran, Mozambique and Thailand. The entire process of setting up plan is getting delayed in question of gas supply (in Bangladesh); Iron ore mine lease in Iran is escalating the Project cost.
Increased infrastructure spending by the Government of India and development of roads could generate significant savings in freight and transportation cost, making Indian steel companies and other industries globally competitive.
Impact of Liberalization: The economic reforms initiated by the government in 1991 have added new dimensions to the industrial growth in general, and steel industry in particular. Some of the important features due to liberalization are:
Licensing requirement for capacity creation has been abolished.
Steel industry has been removed from the list of industries reserved for the state sector.
Automatic approval granted for foreign equity investment in steel has been increased up to 74%.
Price and distribution controls were removed from January 1992.
Restrictions on external trade, both in import and export, have been removed.
Import tariff reduced from 105% in 1992/93, to 30% in 1996-97.
Other policy measures like convertibility of rupee on trade account, permission to mobilize resources from overseas financial markets, and rationalization of existing tax structure.
The Government plays a key role in the economics of TATA Steel. It has a role as a resource allocator (the mining policies of the Government), as Competitor (the public sector steel companies) and as Regulator. In volatile times the regulatory risk rises with measures like reduction in import duties, levy of export duties and withdrawal of DEPB benefits, threats of price curbs etc. Tata Steel counters this risk by being a role-model corporate citizen and playing an important role in contributing to the Nation building. Tata Steel is the second largest steel producer in terms of Geographical spread of its facilities.
Tata Steel Ltd has been awarded the Golden Peacock Global Award for Corporate Social Responsibility (CSR) for the year 2009. The award looks for continual commitment by business to ethical behavior, to economic development and to improving the quality of life of employees and their families, as well as to engagement with local communities and society at large. Look at table appendix 1.0.2, page analysis on Tata Steel Competitor.
Tata steel requires huge chunk of land. Sudden spree of big corporate houses for grabbing land makes the situation even more competitive. Look at table appendix 1.0.2, page analysis on Tata Steel Competitor.
2.0.3: Application of Position Analysis to TATA Steel (4): Boston Matrix
3.0 Tata Steel Major Issues and challenges after conducting
Muthuraman identified three of them–firstly, to run a very tight ship for one or two years, conserves cash and make sure we have enough cash for our future plans and growth and so on. Secondly, restructuring or re-engineering our European operations so that they become globally competitive in the next two or three years. Thirdly, to provide raw material security in terms of iron ore ownership and coal mine ownership to our European operations.”
An even bigger challenge, Muthuraman says, will be running a large multinational, multi-cultural company that Tata Steel has now become–a completely different ball game from what Muthuraman faced in 2001, when he took the reins of a majorly Jamshedpur-based company. As the man who scripted the largest foreign acquisition by an Indian company with the take over of Corus, Muthuraman has set aggressive targets for that globally competitive edge.
Having put European operations in shape, what mills there now sorely need is protection from the capricious behaviour of mining behemoths. As a kind of legacy of over a century old Jamshedpur steel mill which will have its capacity raised to 10 million tonnes during this financial year, it has good raw materials backing, particularly iron ore, chromites and manganese ore. The mill, figuring among the world’s least cost steelmakers, will become increasingly valuable with creation of coated and packaging products in the downstream in conformity with the group policy to steadily increase the share of value added items in its product portfolio.
In the meantime, raw materials have become such a major concern that all Tata Steel greenfield ventures like the six-million-tonnes project in Orissa in two phases will be conditional upon getting access to adequate iron ore deposits. The government should see to it that whether it is captive or merchant mining, all such operations are to be on large scale to facilitate use of best technologies and environment protection.
Volume came to Tata Steel in one go with Corus acquisition. Challenges thereafter are in integrating key functions across the group and seamless knowledge exchange among mills. Such integration happened well earlier with ArcelorMittal. Tata Steel informs that as many as 17 performance improvement teams covering areas like making of iron and steel and flat and long rolling with men drawn from across the group are making significant contribution to manufacturing improvements in multiple locations.
Going forward, what are the main business challenges that Tata Steel will have to cope with to remain at the top?
Both in India and in the rest of the world, the entire steel industry is going to face the challenge of attracting and retaining the requisite talent. I am deliberately saying requisite and not the best talent. It is becoming increasingly difficult for the manufacturing industry to attract talent as opposed to other industries that can afford to pay better and do not call for as much hard work. I am somewhat saddened to see that many of today’s engineers and technocrats pass up the professional challenges that the manufacturing industry offers in favour of supposedly glamorous desk jobs involving little professional challenge.
The other key challenge that Tata Steel is going to face is in the area of manufacturing and mining technology, especially in relation to issues such as conservation of resources and safeguarding the environment. Getting hold of adequate resources of iron ore and coal both in the immediate term and long term is another factor that will have significant bearing on our future position.
What about challenges in areas such as innovation and human resources?
Innovation certainly remains a focus area for us. Innovation has been one of the hallmarks of Tata Steel but this has largely remained restricted to manufacturing and mining, with a focus on cost reduction. For some time now, we have been practising innovation in customer-facing areas, such as product development and marketing. We will need to intensify these efforts. The acquisition of Corus will certainly help us in this area.
In your view, what will be the shape of the Indian steel industry in five years, in terms of size, competition, foreign players, etc? Where do you expect Tata Steel to be within this matrix?
Record production of steel –
more than five million tonnes
Record production of cold
New ferrochrome plant doubles capacity
PAT of more than Rs4,000 crore
Accessing raw material – iron ore and coal
Improving customer centricity
Developing environment-friendly technologiesTata Steel has been and will remain on top in India and I can say this with some conviction. Taking into account the constraints in the system both at the policy level as well as on the ground, I do not see much change in the competitive landscape in India in the next five years. My view is that unless the government takes radical measures to promote the steel industry, growth in demand for steel will continue to outstrip supply and India will continue to face short supply of steel for a long time to come.
Considering Tata Steel’s strengths and the action plans that we have put in place, I am not particularly worried about intensified competition, whether within India or outside. India has the potential to surpass China, provided the infrastructure is strengthened and proper and transparent policies are followed that will encourage the steel industry.
What is the biggest threat that Tata Steel faces as it seeks further growth and expansion? And what about domestic and global competition?
While I remain bullish about the growth of the global economy, a potential slow down could be a serious threat to the steel industry as a whole. My fear is not that it will affect the steel industry in the short run; the bigger threat is that it will reduce investments in upstream industries like iron ore and coal, which will have a more lasting negative impact on the industry, like it did during the previous downturn. The steel industry is even now reeling under its effects. Competition is something that all of us have to learn to live with. Our challenge is to change or improve at a faster rate than the others.
Going forward, the global steel industry will see more consolidation as well as intensified efforts to acquire ownership of raw materials. This will improve the staying power of steel makers and I expect that this will lead to greater discipline in the market place.
new decade brings new challenges. How will India’s burgeoning domestic steel demand influence the global steel dynamics? How will China’s influence on global raw materi- al and finished steel markets evolve and where are the next hot-spots for world steel? What is India’s future roadmap for the sector? How will the Vision 2020 and ‘The Great Indian Steel Dream’ of becoming the largest producer of steel in the world from the current third position be woven together to shape the future of the nation? Can an appropriate ‘Raw Material Security’ plan be drawn to ensure timely supply of essential raw materials to the industry in the days to come?
1.0.2 Industry Analysis The main challenges that Tata Steel is facing:
Firstly, the steel industry has been impacted by the global economic downturn over two year ago. The requirement of steel is growing in Asia, where dow
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