Going Global? Study Tata Steel First – Analysis

Tata Steel’s momentous decision is in keeping with the general trend of Indian companies selling off overseas assets to either repay debt or exit low-yielding assets. Tata Steel’s decision seems to be a combination of both. Here are some other examples of Indian companies selling overseas assets:

• Reliance Industries sold its Eagle Ford shale oil field in the U.S.A. for $1.07 billion in June 2015.
• In October 2015, Bharti Airtel sold telecom tower assets – close to 8,300 towers — in seven of the 13 countries from its African operations. The proceeds: $1.7 billion.
• Suzlon sold German subsidiary Senvion (earlier known as Repower) to private equity company Centerbridge Partners for Rs 7,200 crore in January 2015.
• GMR Group sold three overseas operations during 2013: in March it sold a 70% stake in GMR Energy (Singapore) Pte Ltd for $520 million; in December it offloaded its 40% stake in Istanbul airport and another airline services company f0r a combined $305 million.
• Avantha Group’s Crompton Greaves has been selling its overseas power equipment assets.
• Healthcare company Fortis sold five overseas healthcare assets between 2013 and 2015

This is just an indicative list but does underline India Inc’s troubled liaison with globalisation. Economic reforms and competitive pressures forced many Indian companies to expand operations overseas through acquisitions with either (or a combination) of three objectives in mind – to acquire competitive supply chains, to access consumer markets, to buy into developed technology and intellectual property. However, the fault was not in going global but seemingly, in the timing.

But it also begs the question: how did Indian companies end up borrowing so much that it would subsequently force them to jettison their cherished global desires?

And, how come they never saw the approaching storm, because most of the loans were contracted either just before the crisis or during the slowdown?

Tata Steel’s UK outing is an example that provides an answer. It acquired British company Corus in April 2007, subsequently renaming it Tata Steel Europe. Tata paid over $12 billion for the purchase, most of it debt. Around the same time, the sub-prime mortgage crisis had started undermining global markets, leading to the cataclysmic closure of Lehman Brothers in September 2008 and the subsequent global financial crisis.

The economic slowdown and continuing weakness in European markets affected sales. What exacerbated matters were structural factors — global steel oversupply, increase in third-country exports into Europe, high manufacturing and environmental costs, continued weakness in domestic steel demand and a volatile currency.

Many other Indian companies with ambitions of acquiring a global footprint similarly borrowed heavily either in 2007 or, bizarrely, during 2011-12. A bloated appetite for foreign currency loans was fuelled by historically low interest rates in developed markets. There was also an element of hubris – a mistaken feeling that growth would continue unhindered, unaffected and untouched by global turmoil.

Unfortunately, this also reveals India Inc’s lack of strategic intent and a bewildering ignorance of geo-economic currents. The absence of an in-house risk-mitigating treasury process is exposed in numerous speeches by various Reserve Bank of India governors: most companies that borrowed overseas to finance acquisitions, left their foreign currency exposures unhedged. Consequently, the rupee’s depreciation since 2013 increased their loan-servicing burden.

Tata Steel’s woes, though, could have an additional set of triggers, which could include UK’s geo-political snuggling-up to China, or even the country’s vexed relationship with the European Union (EU).

China has been dumping cheaper steel in Europe after other large markets – including U.S.A. and India – increased tariff barriers. This has resulted in demands within Europe to increase import tariffs as well.

In a February 4, 2016 news release to disclose results for the quarter ending December 2015, Karl-Ulrich Köhler, MD & CEO of Tata Steel in Europe, stated: “Chinese steel shipments into Europe leapt more than 50% last year, while imports from Russia and South Korea jumped 25% and 30% respectively. The European steel association has identified that Chinese steel is being exported at prices below the cost of production…”[2]

In a separate statement, Roy Rickhuss, general secretary of the steelworkers’ trade union Community, said: “I would like to see evidence of the Prime Minister’s claims that they have increased procurement of British steel or tackled Chinese dumping of steel in Europe…The UK is one of the member states opposing the end of the lesser duty rule in Europe, which currently prevents higher tariffs being imposed.”[3]

But Europe is wary of jeopardising its relationship with China – it is the EU’s second-largest export market, and fourth-largest FDI destination.

The EU and the UK dithered on imposing higher import duties on steel because of apprehensions that it might render end-user industries uncompetitive. Higher tariffs present another predicament for the current Conservative government: weighing the cost-benefit of saving the 15,000 jobs at the Tata Steel works versus antagonising new-found friend China.

Tata Steel now involuntarily finds itself inserted into the Brexit campaign. Advocates of Britain’s exit (Brexit) from the EU are arguing that exiting the Union will allow the Cameron government to bail out the Tata Steel plants and save those 15,000 jobs. Currently, EU’s state-aid and procurement rules restrict state-sponsored lifelines to industry, which have been bolstered by two recent rulings[4].

A face-saving formula – which keeps Tata Steel and its workers, Britain, EU, and China happy — might still be in the works. EU Trade Commissioner Cecilia Malmstrom[5] ’s speech at a recent trade conference  provided some clues to such a compromise.

Whatever the fate of  Tata Steel plants and jobs, there is a learning in  this for Indian companies which are looking  abroad: before investing in any jurisdiction, India Inc must  do well its homework about a country’s potential geo-economic tripwires – specifically, its bilateral and multilateral trade and investment agreements – and geo-political risks. This will require corporate India to develop a new  strategic temper and a broader perspective, one that thinks more like a multinational leader with global – not just Western – ambitions, rather than rely only on the template advice  proffered by international bankers and management consultants.

About the author:
*Rajrishi Singhal is Senior Geoeconomics Fellow, Gateway House. He has been a senior business journalist, and Executive Editor, The Economic Times, and served as Head, Policy and Research, at a private sector bank, before shifting to consultancy and policy analysis.

Source:
This feature was written for Gateway House: Indian Council on Global Relations.

Notes:
References

[1] Press Release, BSE Limited, Review of European Portfolio of Tata Steel, 29 March 2016, <http://corporates.bseindia.com/xml-data/corpfiling/AttachHis/EB0CC117_DBF1_47E0_8753_5DEA119FE8B6_082546.pdf>

[2] News Release, TATA Steel, Tata Steel reports Consolidated Financial Results for the third quarter and nine-months ended December 31, 2015, 4 February 2016, <http://www.tatasteel.com/investors/pdf/Q3-FY15-16.pdf>

[3] News & Views, Community, Community responds to Prime Minister’s statement on steel, 31 March 2016, <http://www.community-tu.org/community-responds-prime-ministers-statement-steel/>

[4] Other news, European Commission, Vestager announces EU State aid decisions: Belgium and Italy, 20 January 2016, <http://ec.europa.eu/ireland/press_office/news_of_the_day/vestager-announces-eu-state-aid-decisions-belgium-and-italy_en.htm>

[5] Malmstrom, Cecilia, ‘Trade Defence and China: Taking a Careful Decision’, European Commission Trade defence Conference, 17 March 2016, <http://trade.ec.europa.eu/doclib/docs/2016/march/tradoc_154363.pdf>