Tata Corus was never integrated into global operations

By Malay Mukherjee (As told to Suman Layak)
A merger or an acquisition works best if there is visibility of its success within a short time. This visible success can be delivered only by taking control of the acquisition. When X buys Y, X immediately puts in three or four people he knows well and has worked with in the past in charge of the management of Y and gives them executive authority. Unless that happens immediately, it is bound to not have the desired results. You cannot go back and do it a year later. In Europe, the Tatas decided to continue with Philippe Varin who, nonetheless, left after two years. Then Kirby Adams was brought in to lead it but he also left a year later. Ultimately Karl Koehler, who has now resigned, got a long stint (from October 2010 till February 2016), but was he the right person? His track record was not great at Thyssenkrupp, where he was blamed for overspending with their Brazilian investment.

Taking Charge The Tatas did not really send in a team to take control of the acquisition. Even Uday Chaturvedi who was posted by the Tatas as chief technology officer in Tata Steel Europe in 2010 left after sometime. I always use the example of the merger of German Daimler-Benz with the American Chrysler, when discussing the success of mergers and acquisitions. DaimlerBenz and Chrysler merged in 1998. It was a veritable clash of cultures. Germans were very meticulous about processes and systems. In German factories everyone wears uniforms, something that is not the case in the US. Now a plane was flying almost every day between Germany and the US, carrying Daimler executives back and forth. This is a concept that Americans could not accept. They can accept a Daimler executive posted in the US to head the operations, but not this flying in and flying out. It was also the tip of the iceberg, the visible portion of a deep malaise between the two groups, and a recipe for disaster for a merger.

If you have acquired a company, you cannot be an advisor. You have to be present as the executive authority with your own people. And then you need to identify the big problems that you need to solve. As I see it, for Tata Steel operations in Great Britain (erstwhile British Steel), the big problem was the high cost of raw material. In the beginning of the millennium, the global steel industry saw this reversal of cost structures, when raw material costs jumped from 20% of the total production costs to as high as around 70%. Yet, the discussions I saw were about cutting costs internally by reducing the number of workers, which was really not the big problem. When ArcelorMittal acquired a steel plant in Mexico, we figured that its biggest issue was that it was the only plant in the world that produced flat steel products using the direct reduced iron (DRI) method in iron-making. We decided that beefing up the technical aspects of the plant was our biggest priority. Again, when we went to Kazakhstan, we realised that the big problem with the operation was on the commercial side and we had a 20-people commercial team working on that from the beginning. This is absolutely crucial for early visible success.

A Late Decision Now every acquisition has a rationale. It can be seen as a possible turnaround candidate or as a growth opportunity, or there might be great synergies existing between the two. Synergies can be of three types: expertise, market synergies and homogenisation of manpower and costs. For Tata Steel and Corus, the synergy never happened, and the European operation was kept totally as a separate unit. I remember when I was with Steel Authority of India, the company that brought in technology and helped us was British Steel. However, with the Tatas British Steel could not have helped. Their R&D was never up to the mark with ArcelorMittal or Posco, or Nippon Steel. Apart from raw material costs, the British Steel plants were also some of the most under-invested steel plants. There are others like Sumitomo, Nippon or Thyssenkrupp that have the same raw material issues, but they managed to make profits.

A common management between the two companies was needed to drive synergies. A lot is said about the success of Jaguar Landrover (JLR), but how has JLR helped Tata Motors’ operations? Now let’s try to look from Tata’s perspective. British Steel, the portion of Tata Steel Europe that is being sold, was never profit-generating. Some smaller parts may have made profits, but not the integrated plants. It never gave any returns to shareholders. This is why it joined with the Netherlands-based steelmaker Hoogovens (to create Corus), which was profitable.

Tatas went into this with their eyes open. However, 2007 onwards, the British operations of Tata Steel never made any money. The Port Talbot plant did not have LD gas recovery (capturing carbon monoxide and reusing it elsewhere) and, though the system was installed in 2010, there was a conflict with resistance to the idea from the old Corus directors. From among the British Steel assets, the Tatas had already sold some of its assets at the Teesside Plant in 2011. The buyers, the Thai group SSI, actually went bankrupt last year. It is surprising that today all the blame for the failure of the Corus buyout is being put on market conditions and the China factor; to my mind the China factor would have been the last straw. As I see it, this decision could have been taken four years ago.

(The author is a former member of the group management board of ArcelorMittal)