Tata Steel -"New Steel in an old bottle"
Business India - July 23/August 5, 2001

The recent issue of Business India carried a cover story on Tata Steel "New Steel in an old bottle". Featured therein is an interview with Mr. R.N. Tata. While most of Mr. Tata's views were published, here is a complete transcript of the interview.

BI: How do you look back on the last nine years that you have been Chairman of Tata Steel, which has coincided with the liberalisation of the economy? And what are the challenges for Tata Steel now?
RNT: When I became Chairman, Tata Steel had just come out of the administered price regime and out of an era where many price increases were simply passed on to the consumer. The month I took over there was another crisis because the freight equalisation had just been discontinued. The major markets were in the south and the west and we were located in the east and therefore we had a freight problem as against steel plants located closer to the market.

So we faced a crisis from those two impacts - suddenly there was competitive pricing of products and the removal of freight equalisation-both of which created a great margin pressure for Tata Steel. Tata Steel had come out of an era, which for many other industries at that time also, was a seller's market in which it hadn't really oriented itself to the customer.

That time we set up two task forces, one to look at realisation and the other to look at costs. Both those were headed by Dr. Irani, who had been Managing Director for a year. And I must say that the task forces were not defensive; they went about looking at issues in a real hard way. We made some progress on both those scores. We changed the market pattern; we had been focusing on the east and we had lost some of our long term customers in the west. So we made some efforts to get customers rather than through the trade. And we started to build relationships again, which perhaps SAIL was doing better than us at the time.

In Tata Steel, there had always been a move to lower costs in terms of fuel rates etc. but it was around that time that we started bench marking ourselves with the best of breed in the world. That really paid off, in terms of keeping great pressure on the level of our costs and setting goals that were global goals.

During that time also we made a decision, which turned out to be important, to modernise - not to expand necessarily but to modernise our facilities, and to move ourselves into flat products, which we saw as the growth area in steel.

We went through some difficult years in terms of cash flow and liquidity in the company as we increased our levels of borrowings to see the various phases of modernisation - I, II, III - through. And we did that, simultaneously closing down some of our older mills, thereby reducing our costs and moving to higher value products.

So all of this took place during this time till finally the hot rolled mill and subsequently the cold rolled mill came into being. What has not been so visible is all the back processes that changed like the move from open hearth to LD, or the move from blooming mills to continuous casting-which also were part of the modernisation.

However, we did not, until the new strip mills came into being, have the products to absorb those investments. And so, for a period of time, Tata Steel was out of favour with the investors and the analysts until we moved to the last phase of what we were doing.

Now that we have completed the suite of investments that we made, we are deriving the benefits of the investments we put in place to give ourselves a more modern and a more cost effective steel process. That's what we have achieved over a period of time.

Having said that, it would also be fair to say that the leadership in Tata Steel has had a tremendous role to play in what has been achieved. Jamshed and his team have resolutely gone about making this transition, with no pulls and pressures that it should have been done another way.

I think the only distraction was the view, held by one section of the people in Jamshedpur, that Tata Steel should become a volume producer, should produce 15 million tonnes of steel, rather than become a company that would be the best in its class. And the second destruction, perhaps, was the period when one thought that Gopalpur would be the focal point of that growth.

Those were, in my view, distracting times because those were issues I did not agree with because I felt that growth in steel is going to be difficult and that we should consolidate ourselves and improve our operations before we looked at growing.

BI: But you still gave them enough leeway to play around with the Gopalpur decision?
RNT : Gopalpur was a decision that everybody took as an avenue for growth. Where there were differences were that you could take Gopalpur as a 2 million tonne project or you could take it as a 6 million tonne project and buy land, which the company did, with that kind of size in mind. The Board went along with that view because if you were buying land then you were making an investment and you don't want to be short of land at a later point in time. And the investment made, even if ultimately infructuous, could also come to be seen as being far sighted. So no one stopped the purchase of land but we certainly did exercise ourselves in terms of what should go there. And finally the decision was taken to move the cold rolling mill to Jamshedpur which, in hindsight, was absolutely the correct decision.

BI: What are the policy related issues that are stopping India from setting up steel plants like Pohang which can be the lowest cost steel producer in the world?
RNT: There are several. Pohang, for example, will bulldoze a plant that is obsolete and build another one in its place that is newer. We can't do that in India. We can't reduce our manpower easily. We talked about the protected environment that we have had in India, be it administered price or be it tariff protection. This protection has been, in a manner of speaking, from the outside in. We have never had the sort of reverse protection, of being incentives to be the supplier to the world.

Moving away from steel for a minute. We are today acknowledged as a skill supplier to the world in the IT area. But, you mark my words, given a little time and a little greediness, as a nation we will destroy that. We will start to say: We have given incentives to people to have their foreign income as tax free in the IT area, so now we should tax them or we should put a service tax on this. Pretty soon, we will destroy that one capability that we have, which has not been destroyed till now only because it does not involve capital investment. It involves human capital which has been free, in a manner of speaking, in that it finds its own level.

I believe there has to be something like what MITI did in Japan, where you take two or three thrust areas - and this is never done by individual companies, it is mostly done by governments - and you decide that your country is going to be say, the automotive supplier to the world or you are going to be the semi conductors supplier to the world, and you give that industry all the incentives it needs to develop. You give it a major thrust in terms of product development, tariff free duties, incentives of all kinds. If you do that, you would start to see India as a supplier to the world in a variety of areas.

If I go back to my last incarnation in electronics, in the 70s when the United States was looking for low cost manufacturing bases in semi conductors all over the world, India did not want the Intels and the Motorolas to enter into India, so they went to Malaysia and Thailand and Singapore for assembly. We could have had that industry; we could have been the major producer of semi conductors at the time when it was manual. Now it doesn't matter, it is all automated, they don't need to go to Malaysia, they are doing all their packaging and deep bonding in the United States and there is hardly any human intervention. But at that time people worked through microscopes, they lead bonded, and little Chinese women were seen to be the most productive and the US was not economic at all. India could have had that position but it didn't.

On the back of semi conductors came the entire electronic equipments market which went to those countries also because the chips were produced there and the components were produced there. We lost that whole wave. Then we banned computers from India because we wanted to protect ECIL. So, for many years, the human capital could not work on the machines that they needed to. They worked on machines that were 10 years, 15 years behind their time.

And then the Indian Government decided to open up the economy and what happened? IT just boomed, and not because the government intended it to boom. It just happened that way.
BI: Vinod Dham told me that Robert Noyce, the founder of Intel, came at that time to Delhi and stayed for two weeks. He wanted to start semi conductors manufacture in India.
RNT: I knew Noyce though not very well but I know he looked at India and he liked India. Motorola looked at India. But at that time, IBM had been thrown out of India and no manufacturer was allowed to enter India for hardware. So India became an area that was considered unfriendly in electronics and so the electronic wave just passed India by.

And then we did something worse: We set about justifying all the users using old technology in electronics, and in computers in particular. So everything that we did, from banking to manufacturing to engineering had to live with old technology. We impacted all those industries in terms of productivity, until things opened up. So the lesson to be learned is not to isolate your country in terms of technology.

Coming back to steel, it is really an issue of our deciding that we want to be producers to the world, in which case we must also look at incentivising domestic demand. China has become a 100 million tonne producer, and consumer, of steel and we are still at 20 million tonnes. And when their wave of investments slows down, that capacity is going to go out to the rest of the world.

BI: We always say that construction, steel, cement is going to drive the economy as well as get us out of the current slump. What is your view on this? How do you spur demand for steel in every day use?
RNT: If you look at all the basic industries what you really need to do is to spur investment in infrastructure just now. What's happened in the last few years is that the government has exited that area in the belief that it is going to be turned over to the private sector and that has not happened. Today what we really need is a massive public works campaign, not just for a year or for two years, but a long term one. All of that will give jobs to tens of thousands of people. We have a huge market in India and the demand here should be tremendous. Our infrastructure - roads, ports-has been ignored for many many yeaRs Telecommunications is getting attention now but not from the government, from the private sector.

BI: Do you see the government realising that we need to have massive public spending and so on?
RNT: I can't answer that. I headed an Infrastructure Task Force of the Prime Minister's Advisory Council back in 1998 and I don't think anything has happened in real terms on that report. Then, of course, there has been the Prime Minister's own announcement of the National road project. They are talking of investing Rs 10,000 crores on that. As and when that gets down to the road level, we will see an impact. But the question I have is: how much of that Rs 10,000 crores will actually get down to the ground level and how much will be eaten up by administrative expenditure, creation of departments and entities to handle it?

But I think for the first time there is the realisation that our economy is in trouble. Earlier, I think, there was a period of self denial, maybe because the government faced a dilemma of having to handle the deficit and at the same time stimulate demand. So, the typical response was: nothing is wrong, it is only industry that is inefficient or wailing. And industry has also been parochial - whenever asked, its response has been to say just reduce excise duty. But that's not going to change the demand pattern. What we have to do is to stimulate demand and we have not done anything for that.

When the Asian meltdown happened, India was not hit because we had isolated ourselves from the world economy. Now we are hit while the Asian economies, to some extent, are reviving and when we get hit with the full provisions of WTO upon us we will also have the influx of goods and services from Asia, which will hurt Indian industry even more. So we do have a problem and the only way to handle this is to go on a very ambitious and sustained public works campaign, do some major things that have to be done.

Take the road project that they are talking about. May be it is practical in the short term to four-lane our two-lane roads but the question we must ask is, is that what we want? Do we really want to have a highway network system or do we want to undertake a task that says that we should be able to traverse the country from one end to the other in two days instead of six days? Do we want our ports to be able to achieve turn around time for ships of 24 hours rather than 15 days? Do we want our airports to handle traffic of a frequency of X or handle X million passengers? We never set ourselves those kind of tasks. We will build a new airport with four aero bridges and stop there and then we will look at something else. We never really plan big. We are not in keeping with what is happening around us. When you go to other countries around us you see it visibly that we are just back in time. And yet we have so much to offer.

BI: Just to get back to Tata Steel. I don't know the ground realities in Bihar but there are all these horror stories that we hear about Bihar and in that kind of an environment to build a modern company like Tata Steel and still maintain those values, your Code of Conduct and so on, must have been quite a challenge.
RNT: For that, the credit has to go not to anyone particular today but to a very strong community spirit there has been in Jamshedpur all these years I always believe that what you see happening happens only when there is a sense of pride in belonging to a place, whether that is a country or a city or a community or a company.

The people of Jamshedpur have a very strong sense of pride, coupled with a sense of fear that it should not become like the rest. The facilities in Jamshedpur may not compare with the extreme levels of conspicuous consumption that you see in Mumbai but if you look at what's there at the vast middle class level, they are better than elsewhere in the country. And therefore, people have always rellied around the focal point in Jamshedpur, which in this case has been Tata Steel, to make sure that things remain the way they have been in Jamshedpur.

There have been times in Jamshedpur, even when I lived there, where for Rs 15,000 you could get somebody killed. Those kind of things happened and at one time those kind of things used to happen frequently till finally we had a good SP who came in and cleaned up the place. So it can happen - the rot can happen in Jamshedpur also. But by and large we have been very lucky in that there is a very strong tradition that has been a plus. Tata Steel has been a buffer between the Bihar government and the people, it has been a fair corporate citizen, it has given a lot to the community and it has administrated not in its own self interest but in the broader interest of the community.

I lived in Jamshedpur at the time of the first communal riot in the 60s. But communal riots have been aberrations in Jamshedpur. People have lived side by side and worked side by side and there has been a very strong sense of belonging and security, which has been shattered occasionally but has been rebuilt.

BI: Don't you have shareholders and investors asking why are you giving away Rs 100 crores every year on maintaining Jamshedpur? How do you convince them?
RNT: True, investors and, in particular, foreign shareholders think that this is baggage that we are carrying and, in a manner of speaking, it is. But if you look at the industrial harmony an all the things that you have said, I don't think you can ascribe a value to it. Maybe Rs 100 crores a year is too small a price to pay. You can't convince the shareholders of that but I think if you look at long term trends, I think this is a kind of cost that you have and despite that you are still going to be, hopefully, the lowest cost steel producer in the world, so does it matter?

BI: Tata Steel seems to be looking around for investment opportunities in Ferro chrome, in titanium. Why aren't you looking at steel? Not necessarily at Greenfield projects but at acquiring plants. I was told that many plants that Mr Laxmi Mittal acquired abroad were in fact offered to Tata Steel.
RNT: No, that's not true. But within India Tata Steel has looked at some options. However, when we talk of enhancement of shareholder value, we recognise that, regrettably, the steel industry does not cover the cost of capital - and this is the global situation.

The only reason Tata Steel is looking at other businesses is if today you have to invest the thousands of crores we did in the modernisation of the plant, and if it doesn't give us a return that is equal to the cost of capital, then we have destroyed shareholder value. If I am not earning the cost of money, how can I continue to invest in the steel business given the Indian scene. If you go to an investor and ask him to invest in a company in which the returns are less than the cost of capital, why should he invest?

So what we are looking at, is there another business, may be a related business or even a totally different business, that can have much higher returns than steel, that can help justify the investment in steel so that the investor can get better returns. Just because you are the Tata Steel company does not mean that you can only grow in steel.

BI: They said Tata Steel is looking at telecom.....
RNT : They are looking at various things. You have companies that started in fertiliser and now are in pharmaceuticals, companies that were in steel and now are in telecom. I think Tata Steel's interest in telecom may well have followed the example of Mennesman.

BI: But isn't there the issue of other Tata companies operating in the area of telecom? Won't Tata Steel be stepping on them? Doesn't this look uncoordinated?
RNT: It is coordinated. They haven't decided to get into telecom but the way we looked at it was - let's parcel out various parts of the telecom activity and look at the Group as a whole being in telecom, in the various areas that we want to be in. Ideally, as in the past, what would have happened - and we are still working on that - you would have got one consolidated telecom company in the Group.

But then shareholders say, and with some justification, that this is my money and all I have is dividend returns from the company. So another way to do it is-you parcel it out, even though that is a less efficient way of doing it, and you say this is my total communication space and I will chop it up not in a way that the bits are in competition but in a complementary way, between companies that want to be there and maybe one day I will merge these into one.

BI: You have already been through this in the IT area, haven't you, where you had 8 or 9 companies competing with each other.
RNT: No, we didn't have so many, we had 3 or 4 companies in the same space but today we have been successful in separating them and creating niches so that there is less competition, except in one or two companies which also we will take care in time. But you do not see companies tripping over each other that we used to see 10-12 years ago.

BI: So you don't see one entity dealing with telecom.
RNT: No, I do see that happening but we have to find a way of making it happen.

BI: I understand that greenfield projects in steel are out. But why are you not looking at acquiring plants abroad?
RNT: But we are; I only said to you earlier that the plants that Mittal got were not offered to us. The real issue is that we should be quite clear that we can manage that extra capacity on a global basis also. Mittal was very successful in getting plants at a very low cost - which is the way to do it - and then optimise those operations but his real profits came from revaluing his assets and he is having his problems now in terms of global demand.

So you could get a huge asset of this nature, and you could get it at a very good price, but you need to be quite convinced that you have the product mix which can serve the market place. Or you may end up in a situation of having surplus capacity which will now be outside India which you have now to support in foreign exchange with nowhere to turn. So we need to be ultra cautious looking at these plants.

BI: There has been this rumour going around that in the report they did for your group three years ago, McKinsey's had advised you to dump steel. What is the truth in that?
RNT: McKinsey's did not tell us to dump this or dump that, or go into this or go into that. McKinsey's just gave us discussion notes in various industries. I think what McKinsey's did, in fairness, with regard to steel, has raised some serious questions about whether the steel industry destroyed shareholder value or not. And I must say that they awakened us to the fact that we had to do much more if we had to keep investing in steel to make it an investor-attractive area of business.

BI: Last years' results, with Tata Steel as the most profitable company in the Group after TCS, is vindication of that, isn't it?
RNT: On this we need to be a little measured because what has happened is, as I said, that Tata Steel has now got two high margin plants on line. It has shed its old processes and it has converted some low margin businesses to high margin businesses. Crucial to producing and sustaining these results is, in fact, growth in demand for those high margin items. If its user industries, like auto, white goods and consumer goods, in fact, do not grow or decline, then, in a manner of speaking, Tata Steel will have its problems.

BI: But Tata Steel is not betting on growth in the auto industry because they already have 300,000 tonnes of imports that they can replace.
RNT: True, but I keep warning them that while you are substituting imports you will see growth but once you have covered that, then what happens? And even if demand from the auto industry and white goods picks up and you have over capacity elsewhere in the world and India then is faced with low cost imports, then in fact, even if that is 10 or 15% of the consumption, that will bench mark the price and it will affect margins.

And there are two other pluses that Tata Steel had. Steel is a commodity and Tata Steel has been able to avoid disaster by going full out in production, covering its cost but by dropping its price. Because it is a commodity it can do that but if you are a product company you can't do that, say for a truck or a refrigerator. You can only give a discount which you have to earn back. The other advantage Tata Steel had was that if the Indian market got bad, since it was a commodity, it could export steel. Again in product markets you can't do that as simply because you have to build the brand and so on. But Tata Steel will finally have to deal with global demand and its real test or real challenge will be at that point in time.

In Tata Steel, we started bench marking ourselves with the best of breed in the world. That really paid off, in terms of keeping great pressure on the level of our costs and setting goals that were global goals.