March 2004 | Christabelle Noronha and Saloni Meghani
Stealing the show
Tata Steel uses some of the world's best practices in operations, business processes and marketing and has sought the best benchmarks for management, manufacturing excellence, operating practices, training, branding and customer and retail value
Tata Steel is amongst the lowest-cost steel producers in the world. It has been exporting its products for more than 25 years already. It uses some of the world's best practices in operations, business processes and marketing. Over the years, the company has sought the best benchmarks for management, manufacturing excellence, operating practices, training, branding and customer and retail value with the help of several leading consultants and steel manufacturing companies.
What then would be the implication of globalisation, which means different things to different people, for this company that is almost 100 years old? Most companies are global in some way or another. Does Tata Steel consider itself global? No. "Not significantly enough. We are planning our business model to become more global," says B Muthuraman, managing director, Tata Steel.
As Tata Steel charts out its coordinates on the world map, lets take a look at the why, what, and where of their strategy:
Globalisation is very relevant to Tata Steel’s growth trajectory because the steel market is increasingly becoming global. "A global market is one where a single price holds and all customers can buy that product at this price excluding the transaction and transportation costs. In the steel industry, in every region the regional prices are increasingly being set by global trends.
"Over 25 per cent of the world’s steel production is globally traded. This was less than about 15 per cent only about a decade ago. The steel industry has been globalising very rapidly. The minerals business is also global. While iron ore has been traded for almost over a century, ferro alloys have been traded for over 50 years," Mr Tolia says.
Tata Steel is advantageously poised to make the entire world its playing field. Natural resources like iron ore and ferro alloys are not available in too many geographical locations and India has them in plenty.
The company can monetise some of these resources and use the cash flow to support global initiatives. Secondly, not many steel plants can adapt to market conditions as well as Tata Steel. The company can use its world-class marketing abilities to replicate its success all over the world.
The next natural sequence of questions, then, include what, where and how to globalise. Mr Muthuraman says that these issues are very closely linked to how a company looks at its business. "A truly global company is one where global thinking prevails and decides every aspect of business – where to manufacture, where to research, what type of people to employ and where and how to market the products and services. It is fundamental to think through every aspect of the business in a global context to maximise profits.
"In order to do this, one must have a very good understanding of the value chain and the potential of each of its parts. At the end of an exercise to determine which part of the value chain creates the maximum value at which location and how, you may find that manufacturing is best done in one place while the market is in another, research should be done somewhere else and methods of serving the customer are different in each place. But at the end of such an exercise, one may also come to the conclusion that the most value creating opportunity is to be at home. If you have applied the global test for arriving at such a decision, you are a global company. So globalisation should be seen as a means of value creation and not merely as a means of physical presence," he says.
"Carrying out such an exercise will throw up the model that best suits us," he adds. The company is keeping its time-honoured tradition of thinking each step out.
"India and China are growing. The East European countries have been bottled up for a long time and have just perked up. Activities like construction and sale of more cars here are going to increase their steel consumption. There is going to be a market in the US for a long time because it comprises almost 300 million people with a very high quality of life," says Mr Muthuraman. "It is necessary to evaluate each one of the large and-or fast growing regions," says Mr Tolia.
Currently, China accounts for a quarter of the steel consumption in the world at over 200 million tonnes. North America is at 100 million tonnes, Europe at 150 million tonnes, South East Asia, including Japan, Korea and Taiwan, is at another 200 million tonnes. The Middle East, the CIS and East Europe, and Africa consume about 30 million tonnes each while South America consumes another 20.
The crucial question, according to Mr Muthuraman, is how best to serve the identified markets. What are their characteristics? What are the keys to creating value in these markets? What are the requirements of end users in terms of product quality, delivery and service? It is also important to figure out from where these markets are best served and where steel should be manufactured taking the cost and logistics for service and delivery into account.
The US, for instance, may have a good steel market but if a manufacturing facility is set up there, it will probably run at a loss. "It is very important to understand where value gets added in a market place. If I manufacture in India because it is easier to dominate the Chinese market by being here I would consider myself global because I have applied a global mindset to take that decision. Just by setting up a ferro chrome project in South Africa, I do not become global," says Mr Muthuraman.
So the jigsaw puzzle, with the right pieces in the right place, has to be worked out.
"It is necessary to look at establishing local manufacturing presence backed with a strong supply chain and sound marketing around the plant and in that region. This will enable us to leverage the capabilities we have built up in Jamshedpur. Plus, steel has historically been a nationalistic industry and people won't start shedding their mindset overnight. So it is going to be important to establish local capacities to go beyond the few percentage points of market share that we could establish through only exports," Mr Tolia says.
Tata Steel does not wish to overlook the fact that historically, a third of the acquisitions worldwide do not make profits, deliver the objectives for which they have been made or create value. It plans to tread carefully in identifying the opportunity, negotiating the deal and then merging that acquisition into the parent with speed. "Each of these stages is critical to successfully achieving and sustaining the gains," says Mr Tolia.
But given Tata Steel's record for rock solid strategising, it seems unlikely that its blueprint for globalisation will leave any stone unturned. Steel waters run deep.Other articles on the Tata group and globalisation: