March 2006 | Christabelle Noronha
Footprints across Asia
Tata Steel and NatSteel Asia is a marriage made in business heaven, and this is only the beginning of what promises to be a beautiful relationshipIn business, as in life, timing is critical. When Tata Steel decided to acquire NatSteel Asia the timing was just right for both.
Emerging from a successful phase of domestic consolidation, Tata Steel was aligning itself with the Tata group's internationalisation initiatives and had begun scouting for acquisitions abroad. Around the same time NatSteel had been seeking to establish long term strategic links with players that have cost competitive sources of raw materials. NatSteel needed to get its economics right just as urgently as Tata Steel needed to expand outside the Indian market to take its economics to a higher scale.
In hindsight people may say that a partnership between NatSteel, with its extended chain of enterprises across the Pacific Rim, and Tata Steel, with its fully integrated operations, including iron ore mining, was almost inevitable. But such a rationalisation would do great injustice to the enormous challenges, the foresight and sophistication of approach that the two entities displayed in cementing their partnership.
For Tata Steel the growing ASEAN and Chinese markets are natural targets. "NatSteel Asia, with finishing operations in seven countries was a natural partner," explains Tata Steel managing director B Muthuraman. "But it was more than that; as we interacted with its management team, we saw alignment in their culture and ethos with ours. Given that, taking a decision to go ahead was not difficult."
Natural as it may seem now, when the negotiations were on, Mr Muthuraman wondered how to deal with some vital issues on the ground. "It was the first time Tata Steel had done an acquisition of any scale and of any kind," he confesses.
On the other side of the waters that separate the geographies of the two companies, Oo Soon Hee, now president and CEO, NatSteel Asia, had his own concerns: "Decision making would no longer be only in Singapore; we were a little apprehensive about what we then saw as a cultural divide and the possible differences in having to work with an MNC."
He and others at NatSteel were pleasantly surprised. "Even at the due diligence stage, the team from Tata Steel met twelve of us at NatSteel and handled the interaction very elegantly," Mr Oo reminisces. "They showed concern for our worries. And they were not brash in their dealings."
For the Tata Steel team this approach came naturally, for that is how the Tata group has always believed in dealing with people, insiders as well as outsiders. Says Mr Muthuraman, "People issues are often the most critical ones; once they are managed well, integration at all other levels becomes easier. Integration happens faster when there are many touch points between both the organisations; but in the early stages there is need to hand-hold these interactions to avoid mishaps caused by inadvertent responses."
Striking a similar chord, NatSteel Asia chief Mr Oo says, "Right now we are putting in a lot of effort into strengthening our communication even if it means that we have to over-communicate rather than under-communicate." He adds, "For us, it's a new experience working for a corporate head office in India and for Tata Steel it is a new experience to be more than India-centric.
"In terms of our work philosophy, and style of working, I don't see a discernible difference between Tata Steel and ourselves. I think that is why there was a lot of comfort at both ends even at the time the due diligence was done. Had there been a lot of difference in the philosophy, style and work values, then integration would have been difficult or close to impossible."
With this important initial hurdle crossed, Tata Steel can leverage the NatSteel deal to build a more expansive future.
What NatSteel has brought to Tata Steel, says Mr Muthuraman, is "a footprint in the region which we can build on, it has given us a customer base for close to 2 million tonnes of steel overnight. We own a brand name that has strong brand equity in the steel market in the region. It has given us human resources and a management team with a wealth of experience there. It has made us a strong regional player in long products, including wires, given us the access to knowledge and expertise in downstream processing of rebars and wire rods, and given us finishing facilities to support upstream capacity expansions in India."
Integrating NatSteel's operations is a challenge because of the complexity of the acquisition. NatSteel Asia operates in seven countries through over fifteen legal entities, has steel mills in Singapore, Malaysia, China, Philippines, Vietnam and Thailand, and has at least five joint venture partners.
As Mr Muthuraman puts it, "The integration needs to happen at different levels in different countries and different cultures. We have made reasonable progress, and both management teams are working as a team to make this a success."
Gan Seng Tiong, senior vice president, production, is, however, not worried, "At the beginning, when the news broke about Tata Steel acquiring NatSteel Asia, there was anxiety," he says. "But after we explained that Tata is a big group and they are in the business for the long term, our people understood." Adds Liu Fang Joo, senior vice president, human resource and communications, "Our employees are looking forward to company expansion. They are getting excited and are seeing NatSteel Asia and Tata Steel as a good combination."
Ultimately, what will count is the strategic perspective that is brought to bear on the combined operations. Mr Muthuraman explains: "As a long-term strategic investor we want to unlock value in a sustainable manner rather than look at NatSteel with the short term view of a financial investor who may want to exit in a few years."
You've guessed it — all this is easier said than done. And Mr Muthuraman is the first to admit it. "There are various dimensions along which integration must take place," he says, enumerating what's involved. "These include organisational and knowledge integration, system and process integration, operations integration, product and market integration, financial integration, people integration and integration of growth plans." The good news: "We have made progress of varying degrees on all these dimensions and have learnt a lot in the process."
For any integration process to be successful, addressing anxiety levels among people is only the beginning. At the end of the day, the management needs to address shareholder expectations and unlock value from the latent synergies between the entities.
"The challenge," says Mr Muthuraman, "is to create an environment in which both teams work as one towards a common goal."
The strategy is clear: run steel making facilities closer to raw materials and finishing facilities closer to markets. NatSteel Asia is Tata Steel's beachhead in the ASEAN region, with an overall population of almost 500 million. The infrastructure needs of the region are huge, and demand for steel can only rise in the long term. The Tata Steel management expects strong growth in steel consumption in the area for at least the next two decades. Local conditions in many of these countries also favour local finishing operations.
Yet another advantage NatSteel Asia brings is its location in Singapore, the business hub of the region. "Not only is the city-state connected very well logistically to all the countries of the region, it also provides world-class infrastructure for corporate operations", say Phyllis Ang, company secretary and senior VP, legal. Also, as Lim Say Yan, executive vice president, finance, points out, "Singapore could also prove to be a springboard for new ventures in international markets, for it is also one of the largest financial centres in the world."
But location is not all. "Since they source all their raw material from outside, they work on thinner spreads than Tata Steel does and hence buying and selling decisions have to follow each other very closely. Since in many of the countries NatSteel operates with joint venture partners it brings to the table a strong experience of negotiating and operating JVs. While Tata Steel has the experience in running integrated steel plants, NatSteel brings in what is called the 'mini mill' culture and agility to the table", says Mr Muthuraman.
The synergies extend to the product portfolio. NatSteel Asia and Tata Steel will together offer a more comprehensive basket of products to their customers and provide more effective and complete steel solutions than either of them did individually in the past. In marketing, the shared learning of both organisations in the areas of institutional and retail selling is expected to enable the two partners to improve their market shares in their respective geographies.
The acquisition is also expected to lead to a more optimal configuration of facilities, as Tata Steel will implement its concept of de-integrated manufacturing of steel. Such a strategy is expected to provide flexibility to both companies in designing their product-mix. "We are the only steel company in this region with a long products footprint in so many countries," says Mr Muthuraman.
"We are also now one of the largest wire manufacturers, not only in the region but also in the world. In the products that we make we have the largest market shares in places like Singapore, Thailand and the Philippines. We hope to strengthen our positions in the next few years," adds Chang Meng, executive vice president, operations.
At Tata Steel things are moving. And how! The acquisition of NatSteel has been followed up by announcements of greenfield projects in Orissa, Chattisgarh and Jharkhand in India. Tata Steel will shortly acquire a 55 per cent stake in Millennium Steel, the largest steel producer in Thailand. Millennium Steel will add 1.7 million tonnes of steel-making capacity annually to Tata Steel, and three operating facilities to the stable. Negotiations are under way in Bangladesh and South Africa, and Mr Muthuraman says they are "very much on schedule".
In other words, it's all moving in line with the company's stated objective of achieving the next milestone of reaching 15 million tonnes by 2015.
The China factor
What's 15 million tonnes against the backdrop of China? That country's market absorbs over 300 million tonnes of steel. After expanding steel capacities at breakneck speed, China has now begun a process of rationalisation. Efficiency is not a hallmark of steel making in China, but as its steel industry streamlines itself it will exert more competitive pressures on others. Expectedly, the debate in the Tata Steel-NatSteel combine about the China factor is an active and intense one.
"China is a fragmented market," says Woo Kwai Merng, senior vice president and head, wire products. "We have 50 companies doing the same kind of products. It is a very fragmented market where no one has a market leader position. To do well in China, you must do what others cannot do. It is not a market that you can ignore."
The Tata group would however prefer to be a significant player wherever it operates. "If you sell 5 million tonnes, or even 10 million tonnes in China, you'll still be a very marginal player," exclaims T V Narendran, executive vice president, business development.
The Tata Steel-NatSteel Asia combine has a small capacity in China. But that's neither here nor there in deciding how its China operations should develop. On their own, the China operations are doing well. A Group wire plant there is one of the top five wire plants in the country, and its capacity will double in 2006.
The in-house debate on China addresses some fundamental questions. As Mr Narendran outlines it, "Is there an opportunity to be a niche player in China? Can we pick a province or two and say we will be a significant player there? Or can we pick a process and say we will be a significant player there?"
It's a dilemma; for, even as China continues to tantalise, the ASEAN region — a familiar terrain — beckons. "We have set the NatSteel management a target to have a finishing capacity of 6 million tonnes in the region in the next five years and they are actively pursuing this goal," says Mr Muthuraman, adding, "We are evaluating opportunities in at least three countries in the region."
The proposed acquisition of Millennium Steel in Thailand is one of the three, and given the scorching pace that Tata Steel has set through the year, more deals should follow soon. The expansion will be supported by the upstream expansion of capacities in India that have already been announced.
With the integration in place, Tata Steel has now made the transition from being a strong player in India to a regional player in South-East Asia. "We have the potential and the plans to become a dominant player in South Asia and ASEAN," says Mr Muthuraman. "Our expansion plans in India and our growing footprint in the region obviously makes us a stronger player in the region."
So China may have to wait, or maybe not. Either way, the clock and the calendar won't catch Tata Steel and NatSteel Asia cold. These guys know a thing or two about timing.